In the soap opera that is the fraud-ridden retailer Steinhoff, there are some roles you’d want to play, and roles you’d run a thousand miles to avoid. No-one today wants to be CEO Markus Jooste, for example, the man accused of being the mastermind behind the fraud which led to profit being inflated by R106bn over a decade.
Nor would you choose to be his successor as CEO, the steely corporate lawyer Louis du Preez, who has the unenviable task of cleaning up the mess and trying to make sure the retailer doesn’t drown in debt.
On the other hand, you wouldn’t mind being one of the squadron of lawyers making a mint off the battle to wring "damages" out of Steinhoff for the fraud. Linklaters, for one, scored R83m last year. It’s almost hard to hear yourself think in Stellenbosch, amid the mental calculations of legal eagles estimating their mean time to yacht purchase.
However, the role you’d really want, the Oscar winner, would be that of the "distressed debt funds" (or "vulture investors", as some dub them) which, early on, bought the legal claims against Steinhoff from some of the world’s largest banks, and now stand to make more than R37bn.
It dates back to 2017 when, after the revelations of fraud, the banks that had lent billions to Steinhoff — including JPMorgan, Bank of America and Commerzbank — cut their losses and sold their claims at steep discounts to these funds, which fancied they’d be able to collect this debt. Within months, these funds had arm-wrestled Steinhoff into a sweet deal, in which they provided cash to keep the retailer alive, but would get 100c for every dollar they were owed, plus 10% (in euros). Steinhoff had no choice.
By contrast, Steinhoff’s other claimants, including the pension funds and other investors, were offered between 5% and 29% of the $10bn they claimed under a "settlement" proposed by Du Preez to end the legal wrangling.
But after a remarkable judgment last week, all bets on the "settlement" going through are off. "The court ruling is far-reaching: it means, paradoxically, that liquidation is closer than ever, but so is a new settlement deal which makes everyone happy," says one lawyer involved in the process.
Judge Lee Bozalek ruled in the Western Cape High Court that the agreement that Steinhoff struck with those lenders in 2019 must be scrapped. In 2014, the banks first lent Steinhoff €465m through a convertible bond, and in 2019, this debt arrangement was "restructured", to allow Steinhoff to borrow more. Today, Steinhoff owes them €1.58bn. But Bozalek ruled that the lending agreement is "in breach" of section 45 of the Companies Act, which governs how firms can provide financial assistance, and is therefore "void".
I expect Steinhoff will go back to the drawing board and table a new proposal in the next few weeks
It was a technical ruling, but the upshot wasn’t: it meant "distressed debt" funders, who’d expected the full repayment of €1.58bn, plus interest, can’t be sure they’ll get it.
These lenders have options. They’re unlikely to punt for liquidation (as they’d recover less), but could sit tight to see if Du Preez appeals against the ruling, or they could reach an "agreement" to accept less than the full 100%.
And, if they go for that last option, it would give Du Preez a free hand to offer more money to other legal claimants, including asset managers Allan Gray and Coronation (who invested people’s pensions in Steinhoff, but have only been offered 5% of their claim).
This, would be a fairer option — but then, fairness has never been much of a guiding principle in high finance.
Braam van Huysteen, the founder of Tekkie Town who has a R1.85bn claim against Steinhoff (for which he’s been offered 5%), says: "If we reduce the payment to these financial creditors, who came in opportunistically after the collapse, it would mean more money for everyone else."
Bernard Mostert, Van Huysteen’s partner in Tekkie Town, says Bozalek’s ruling is fatal to the settlement. "Steinhoff needs to go back to the drawing board. I expect it will table a new proposal in the next few weeks," he says.
Steinhoff, he says, is unlikely to appeal the ruling as it would "compromise its timeframe for the settlement".
Steinhoff, as usual, is saying as little as possible. On Monday it said the deal with the financial creditors was now "void", and it was "considering the implications".
The point is, no-one knows what this means — which is why Steinhoff’s share price got (another) beating on the JSE on Monday, falling 16.3% to R1.68. (That needs context: the price is down 97% over the past five years from R90, even though it has "recovered" 60% over the past year.)
Much now rests on whether these "financial creditors" will be willing to accept a lower amount. It’ll be a tough ask: overseas hedge funds haven’t made billions by indulging in sentiment, or displaying an aptitude for compromise.
Even the identity of the 50 or so funds is murky, though it seems these include the Boston-based hedge fund Baupost, London-based Farallon Capital Management, the Connecticut hedge fund Silver Point Capital, US asset manager Davidson Kempner, and various New York funds including Sculptor Capital Management, Centerbridge Partners and York Capital Management.
As Mostert put it: "A lot of these vulture investors entered into [this] knowing full well that this was the result of fraud, so they could have foreseen this. Anyway, how fair would it be for SA entrepreneurs, who have lost their life’s work, and smaller investors, to see so much of Steinhoff’s remaining assets flow to New York and London?"
Steinhoff is at an inflection point. As much as liquidation is closer, it’s a golden opportunity for Du Preez to squeeze some extra cash out for the smaller investors, which would ensure the "legal settlement" succeeds. If he can do that, it’ll not only ensure Steinhoff’s future, it’s more than anyone would have expected when it crashed four years ago.
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