Another Steinhoff blow: Moody’s cuts credit rating to seven levels below investment grade

by Loni Prinsloo

(Bloomberg) – Steinhoff International Holdings NV suffered another blow on Thursday when Moody’s Investor Services downgraded the company’s credit rating deeper into junk.

A Steinhoff International Holdings NV logo sits on display outside the company’s offices in Stellenbosch, South Africa. Photographer: Waldo Swiegers/Bloomberg

Moody’s cut Steinhoff’s corporate family ratings by three notches from B1 to Caa1, which is seven levels below investment grade and means the company poses a “very high credit risk,” according to the rating agency’s definitions. This is the second multi-level downgrade to hit the furniture and clothing retailer since it disclosed accounting irregularities and the departure of Chief Executive Officer Markus Jooste on Dec. 5.

The ratings provider kept Steinhoff on review for further downgrades, saying the company may face challenges in being able to repay or refinance 1.47 billion euros ($1.75 billion) of debt maturing next year.

“Steinhoff’s liquidity levels could prove insufficient to sustain its European operations in the near term if it is unable to shore up its cash balances or other sources of liquidity,” Moody’s said in a statement. “The situation has been compounded by its operating companies placing an additional liquidity burden on Steinhoff’s centralized treasury function to fund their working capital needs.”

South Africa-based Steinhoff, which owns retailers globally including Mattress Firm in the U.S., has had to contend with canceled credit lines as the company struggles to shore up the confidence of some of its creditors after reporting accounting irregularities that stretch back to at least 2016. Steinhoff had been rated investment-grade by Moody’s until Dec. 7, when the rating company knocked it down by four notches.

Shares in the owner of Conforama in France and Pep Stores in Africa have plunged about 90 percent this month. The retailer has expanded aggressively around the world with a series of acquisitions, including Poundland in the U.K.

Moody’s downgrades Steinhoff to B1 from Baa3, rating on review for further downgrade

Global Credit Research – 07 Dec 2017 

London, 07 December 2017 — Moody’s Investors Service has downgraded the issuer ratings of Steinhoff International Holdings N.V. (Steinhoff) and Steinhoff Investment Holdings Limited, and the senior unsecured notes rating of Steinhoff Europe AG by four notches to B1 from Baa3. At the same time, Steinhoff Investment Holdings Limited’s national scale long-term issuer rating was downgraded to Baa3.za from Aa1.za. The ratings were simultaneously put under review for further downgrade.

The downgrade of Steinhoff’s ratings and review for further downgrade reflect the uncertainties and implications for the company’s liquidity and debt capital structure arising from an announcement by Steinhoff’s Supervisory Board on 6 December 2017. The Supervisory Board advised that new information has come to light which relates to accounting irregularities requiring further investigation with the possibility of restatement of prior years’ financial statements. This prompted the immediate resignation of the CEO.

Given that allegations of accounting irregularities were raised and rebutted in August 2017 and again in November 2017 it calls into question the quality of oversight and governance at Steinhoff.

Ratings rationale

Steinhoff International Holdings N.V’s B1 rating and Steinhoff Investment Holdings Limited’s B1/Baa3.za ratings continue to reflect the company’s: (1) large scale; (2) business and geographic diversity; (3) incorporation in the Netherlands with limited EBITDA exposure to South Africa; and (4) extraction of volume-driven cost benefits from being a vertically integrated retailer.

The ratings have also previously considered a number of apparent strengths including Steinhoff’s position in the mass discount market, where it continues to grow market share and holds between the top and third-largest positions in its various operating regions and segments. Steinhoff’s resilient operational profile reflects its exposure to the better performing economies in Europe, as well as its focus on the mass discount market.

Moody’s further recognizes the financial flexibility offered by Steinhoff’s substantial listed investments and almost completely unencumbered European property portfolio spanning retail, warehousing and manufacturing.

Steinhoff’s credit profile comprises complex corporate legal structure and financial reporting considerations. This is a feature of rapid expansion by the company through acquisitions. This complicates the assessment of trend lines for credit metrics.

Moody’s review will focus on the findings of Steinhoff’s Supervisory Board investigation into accounting irregularities and the consequences for the company’s credit profile. Should further details of the accounting irregularities put additional pressure on Steinhoff’s financial condition, this could lead to further downward pressure on the ratings.

Incorporated in the Netherlands, Steinhoff is a vertically integrated retailer servicing value-conscious consumers and investing in complementary businesses. Steinhoff is a parent company, with full ownership of Mattress Firm Holding Corp. and Steinhoff Finance Holding GmbH, with the latter housing its operating assets in Europe, the UK and Asia Pacific. Steinhoff also fully owns Steinhoff Investment Holdings Limited, which houses its African operating assets, including its 76.81% investment in Steinhoff Africa Retail Limited.

Based on the six months ended 31 March 2017 financial report, Steinhoff Europe AG, which is 100% owned by Steinhoff, reported revenues of approximately €6 billion.

The principal methodology used in these ratings was Retail Industry published in October 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Moody’s National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody’s global scale credit ratings in that they are not globally comparable with the full universe of Moody’s rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a “.nn” country modifier signifying the relevant country, as in “.za” for South Africa. For further information on Moody’s approach to national scale credit ratings, please refer to Moody’s Credit rating Methodology published in May 2016 entitled “Mapping National Scale Ratings from Global Scale Ratings”. While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1060333.

The Local Market analyst for this rating is Douglas Rowlings, +971-4-237-9543.

Regulatory disclosures

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.