Shareholders have to wait for news on Steinhoff debt restructuring plan

Steinhoff roller coaster

The hope

Ron Klipin, a senior analyst at Cratos Capital, says that the proposed plan is a potential ‘game changer’. It would give the group a three-year window in which it wouldn’t have to pay back any debt, and interest payable would also be capitalised.

“This will enable it to clean up the balance sheet and sell non-core assets, with some chance of generating positive cash flow,” Klipin says. “It may also give the company time to reduce costs at centre.”

This would reduce the pressure to sell the best businesses in the group, which it may otherwise have to do just to pay back its debt.

“It could be the saviour of the business,” Klipin says. “Otherwise it risks going into business rescue or liquidation.”

This is the dilemma facing both creditors and shareholders. If creditors don’t accept the deal, they may well be settling for a scenario in which they will not get all of their money back. By supporting it, however, they will be wondering if they are just kicking the can down the road, or if there is a likelihood of success.

The reality

As Saul Miller, a senior investment professional at Truffle Asset Management points out, either way Steinhoff has a hard road ahead, trading itself out of the €9.4 billion (R145 billion) debt currently on its balance sheet.

“Our key concern is the debt to Ebitda (earnings before interest, taxes, depreciation and amortisation) ratio,” Miller says. “It’s currently around eight times, which is a very high level of gearing.

“That’s even excluding the legal cases or any other liabilities that come to the fore,” he adds. “Any kind of assumptions you need to make on that level of debt to Ebitda are quite extreme.”

Reaching a lock-up agreement with creditors does create some room to at least see how that can be reduced.

“It gives Steinhoff breathing space for a couple of years,” Klipin says. “It gives them a chance to keep the good businesses going, which are cash generative – things like Star and Pepkor Europe – and maybe allows them time sell out of non-core assets, which are barely cash generative. They could take their time to do a whole portfolio review without having to conduct a fire sale of assets.”

‘New holdco’

That at least means that shareholders still own a going concern, but part of the restructuring plan is that a new governance structure will be put in place. This includes a new holding company that will effectively control the European assets.

The board of this ‘new holdco’ will be made up of six people, four of whom will be appointed by creditors. This means that, effectively, Steinhoff’s creditors will take charge of this part of the business, and Shareholder influence will be diluted.

While shareholders and creditors broadly have the same interests, they are not necessarily always in agreement. For instance, creditors may want to freeze capital expenditure in order to secure short term cash flows. This might help them to get their debt paid back, but its not in the interest of long term shareholders who would want to see adequate investment in the business.

These kinds of complex scenarios have become the rule with Steinhoff, where there are still many possible permutations. But while shareholders will lose some control if the debt restructuring plan goes through, it’s still possibly better than losing everything.

“I think there’s a lot more to lose if it doesn’t happen,” says Klipin. “It would mean going back to the drawing board.”

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