? Wall St banks braced for ?1bn loss on Steinhoff slide
BofA, Citigroup and Goldman exposed on loan to billionaire Wiese secured by stock
Christo Wiese tendered his resignation from the board on Thursday
Christo Wiese tendered his resignation from the board on Thursday
Wall Street banks including Bank of America and Citigroup are facing potential losses of more than ?1bn on loans made to the billionaire backer of Steinhoff International, the South Africa-based home retailer whose shares collapsed last week after disclosing accounting irregularities.
The banks lent ?1.6bn to then Steinhoff chairman Christo Wiese in September 2016, which was secured against ?3.2bn worth of Mr Wiese?s shares in the company, according to public documents issued by Steinhoff.
However, the value of Mr Wiese?s shares pledged against the debt has plummeted sharply with the 80 per cent plunge in Steinhoff?s share price, which has wiped ?10bn off its market capitalisation since last Tuesday. This has left the value of the stock held against the loans at less than ?400m.
That means that Mr Wiese?s collateral on the margin loan ? which allowed him to borrow money to invest using his shares as security ? is worth far less than his debt to the banks.
Mr Wiese, who stood down as chairman of the supervisory board on Thursday and whose resignation as interim chief executive was confirmed by a person close to the company on Friday, used the funding to purchase new shares in Steinhoff. These were issued as the company struck deals to acquire Mattress Firm in the US and Poundland in the UK.
The margin loan was assembled by Citigroup, Goldman Sachs, HSBC and Nomura, and later extended to a broader set of institutions including Bank of America.
People familiar with the structure of the agreement said that they were non-recourse, meaning that Mr Wiese?s other assets and holdings could not be seized by the banks to pay back the loan.
Given the sudden and unexpected drop, the normal triggers built into such structures to protect banks from a loss did not kick into place.
BofA has the largest net exposure to the loan of between ?300m and ?400m, while Citigroup?s exposure is more than ?200m, according to several people following the situation.
Goldman Sachs and HSBC are exposed to about ?120m each, while BNP Paribas has roughly ?100m. JPMorgan Chase, Nomura and UBS are also exposed, these people said.
Some of the lenders involved in the margin loan already sold their shares. Steinhoff late on Thursday announced that banks enforced the sale of 98.4m shares, less than 16 per cent of the 628m Steinhoff?s shares Mr Wiese pledged as collateral in 2016.
One of the people familiar with the situation said some of the banks have held discussions with Steinhoff about a standstill from selling further shares in the company until the new year. Another senior banker said his bank was trying to determine the potential value of Steinhoff?s assets and whether its stock could recover.
Bankers said that they were caught off-guard because Steinhoff had enjoyed an investment grade rating from Moody?s. The highly acquisitive retailer announced last week that it had to suspend the release of its 2017 financial results and revealed the immediate resignation of its chief executive, Markus Jooste, leading to a rating downgrade.
German prosecutors last week said they are investigating whether Steinhoff inflated its revenue and book value. Steinhoff?s supervisory board has commissioned PwC to carry out an independent investigation. South Africa?s auditing watchdog on Friday said it had opened an investigation into Deloitte which signed off on Steinhoff?s accounts
Steinhoff on Wednesday night announced that the accounting irregularities are not only confined to the most recent fiscal year, which ended on September 30, but reached back into the previous one. ?The 2016 consolidated financial statements will need to be restated and can no longer be relied upon,? the company said.
A senior banker last week described the broader fallout as a ?s*** show?. Among the creditors is the European Central Bank, which bought some of Steinhoff?s debt under its quantitative easing programme.
BofA, Citigroup, Goldman Sachs, HSBC, UBS, JPMorgan, Nomura and BNP Paribas declined to comment. Mr Wiese was not available for comment.
At the core of the accounting probe are assets worth ?6bn held outside South Africa. Steinhoff said the assets? ?validity and recoverability? are in question but did not disclose any details.
Steinhoff is working with Moelis & Company and AlixPartners as independent financial advisers. It earlier announced it is seeking to raise ?3bn in liquidity by selling non-core assets and other measures.
The ECB this year bought parts of a ?800m bond issued by Steinhoff and is thought to hold about ?130m. The bond is due to mature in early 2025 and has a coupon of 1.875 per cent. The bond was acquired by Finland?s central bank as part of the ECB?s bond-buying programme.
ECB president Mario Draghi on Thursday told journalists that the governing council is discussing selling its Steinhoff bonds. A person familiar with the proceedings said a decision is unlikely before the end of the year.
Mr Draghi said the losses had been exaggerated ?a factor of 10? in some reports, without specifying which. Any loss would be shared among the central banks that are part of the currency area according to a so-called ?capital key?, which roughly equates to the size of member states? economies.?
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