The Next Enron? Debt-Heavy Steinhoff Looks Like a Doozy

Steinhoff International Holdings is emerging as the poster child of oligarch banking in this cycle. Using debt, it acquired nine companies in the past two years, including Mattress Firm Holding in the U.S. When you see empty mattress stores in low-rent districts, many are Steinhoff’s.

Last year, billionaire Christo Wiese, the largest shareholder of the company, pledged 628 million of Steinhoff’s shares in collateral to borrow money from an assortment of banks: Citigroup, Bank of America, HSBC, BNP Paribas, Goldman Sachs, Nomura Holdings.

Several South African banks are involved. Banking problems with one of the country’s formerly richest men could not be more poorly timed. RSA just received a debt downgrade to junk status. The SA banks are Standard Bank Group, Investec, Rand Merchant Bank, a unit of FirstRand. Bloomberg reports, South African Finance Minister Malusi Gigaba said he’s “mindful” that many retirement and savings funds will be hurt by the loss in value and has asked the PIC to prepare a report on the extent of the exposure.

On Wednesday, Dec. 6, the annual report should have been released. Instead, the company announced cryptically that “accounting irregularities” had “come to light” that required “further investigation,” and that CEO Markus Jooste had been axed “with immediate effect,” and that it would postpone its annual report indefinitely.

Reuters reported in November that Steinhoff “did not tell investors about almost $1 billion in transactions with a related company despite laws that some experts believe require it to do so.” Short-seller Viceroy Capital has alleged that Steinhoff used such related-party transactions to channel losses off its financial statements a la Enron.

Next, the company announced on Thursday that it was trying to prop up its liquidity by selling some units. And it made more statements hinting at problems with that: It “has given further consideration to the issues subject to the investigation and to the validity and recoverability” of some assets stated as “circa €6 billion” ($7 billion).

The shares, traded in Frankfurt and held widely by international investors, had still been in the €5-range in June. But in August, German prosecutors said they were probing whether Steinhoff had booked inflated revenues at its subsidiaries. Shares began to drop. By Tuesday, there were down 41% at €2.95. On Wednesday, after the “accounting irregularities” had “come to light,” shares crashed 64% to €1.07. By Friday, they’d dropped to €0.47. Market capitalization plunged by about €18 billion ($21 billion) since June to €2 billion.

The value of Weise’s pledged shares has plunged to €301 million, from about €3 billion a year ago.

Then on Thursday, Moody’s downgraded the company four notches in one fell swoop, from Baa3 (one notch above junk) to B1, which is well into junk, and added “on review for further downgrade.” Keep in mind that these deeply hair-cutted bonds are senior to banks loans, which according to Bloomberg amounted to $21 billion as of the end of March.

The company’s caca bonds, are also held by the ECB. Junk bonds have experienced boom times because the ECB has been buying these instruments, purposefully inflating their prices and pushing down yields. This scheme allowed an inside player and oligarchical company like Steinhoff to borrow at a cost below 2%. The Steinhoff bonds underscore how the ECB has become a “bad bank” of sorts, buying bonds from crony-run weak companies and then watching the bonds crash on its books. Yes, this central bank, in ambulance-chancing mode, has been purchasing bonds that won’t be repaid. Whodathunk.

Ideally, the shareholders and creditor banks behind the ECB will eat these potentially massive loses from ambulance chancing. The ECB has capital of €11 billion held by the national central banks of the member states as shareholders.

Some European Central Banks have been nationalized, meaning citizens are in line to take the hit for this corrupt recklessness.  Others such as Belguim and Austria are hybrids, 50% owned by state, half privately. France’s was privatized in 1993. Information on shareholders is hidden and scant, and information on each country is oddly not revealed, but can be looked up separately here. TNN in our smell tests holds omission and opaqueness as equivalent to lies and fraud.

This tiny sliver backs its Ponzi scheme speculative inflated portfolio.  However, in a parasite-guild central-bank system — unless somebody stands up to them — the public and future generations will be handed the losses.