ECB Caught In Sprawling Scandal After Bonds It Owns Implode

Tyler Durden's picture

While you were sleeping, the stock and bonds of a relatively unknown company in the US, but is a household name in much of the rest of the world, Steinhoff International Holdings NV, plunged after its chief executive officer resigned amid accounting irregularities, with the company announcing that it was indefinitely delaying the release of its results, citing a criminal and tax investigation in Germany that dates back to 2015, rocking a company that’s rapidly expanded from its roots in South Africa into a retail empire spanning Australia, Europe and the U.S.

As Bloomberg reported, the owner of the France-based Conforama furniture chain, Mattress Firm in the U.S. and Poundland in the U.K. and which employs 130,000 people worldwide, said late Tuesday that CEO Markus Jooste quit as it appointed auditor PwC to probe the matter. Prosecutors have said they’re looking into contracts valued in triple-digit millions of euros that appeared to have been conducted with third parties but may have actually involved different units within the company. The company said in August that “no evidence exists” that Steinhoff broke Germany’s commercial laws. It also said a report in Manager-Magazin that Jooste is among employees being investigated by German prosecutors contained information that was “wrong or misleading.”

Snarkily summarizing the scandalous events involving the aggressive acquiror, Bloomberg said "Retailers Can Forget About Being Bought by Steinhoff Now."

While the back story behind this sprawling scandal - much of which has to do with South Africa's culture of corporate corruption - and the company's sudden implosion is fascinating...

The findings mark a striking turnabout for billionaire Chairman Christo Wiese, South Africa’s fourth-richest man and Steinhoff’s biggest shareholder, who’s taking over the CEO role on an interim basis. Since he bought into the company in 2014, he’s accelerated an acquisition drive alongside long-term ally Jooste. In addition to purchases like the U.K.’s Bensons for Beds, the company has made plays for appliance chain Darty in France and household-goods retailer Argos in Britain.

 

As recently as Nov. 3, Wiese bought 2 million Steinhoff shares at more than three times the price at which they were trading in Johannesburg on Wednesday. That deal alone has cost the chairman 87.7 million rand ($6.4 million). In October, Steinhoff bought back 78 million shares, a deal handled by Johannesburg-based PSJ Capital Pty Ltd. Jooste also resigned as a non-executive director of PSG.

 

Wiese had a net worth of $4.3 billion as of Tuesday, according to the Bloomberg Billionaires Index. He and Jooste, 56, both own properties in the scenic wine country around Cape Town, alongside other notable South African businessmen including Whitey Basson, who ran retailer Shoprite Holdings Ltd. for 37 years until earlier this year.

.... it's what happened to the company's publicly traded securities that was just as interesting, and could have far greater implications.

In kneejerk response to the news, Steinhoff's stock slumped as much as 72% Wednesday in Frankfurt, wiping out more than €7 billion ($8.3 billion) in value, before closing 64% lower at €1.08 euros. The stock closed at €5.075 on its first day of trading in the German city in December 2015, when the company moved its primary listing from Johannesburg.

But it is what happened to the company's bonds that mattered most: Steinhoff International debt plunged, with €800 million of senior unsecured bonds due in 2025 falling as much as 41 cents on the euro, to 42 cents, before rebounding modestly. What makes the collapse remarkable is that the notes were issued just six months ago, in July, and have a Baa3 investment-grade rating from Moody’s Investors Service.

But the real punchline is who was one of the bond buyers: this guy.

That's right: the ECB has emerged as the most prominent, if not so proud, owner of Steinhoff 2025 bonds as a cursory look of the ECB's latest holdings (courtesy of UBS) reveals:

An ECB official confirmed, telling Bloomberg that the central bank owns "some" of the January 2025 bonds, declining to elaborate on the size of the holding (although it is limited to 70% of the total issue size). As Bloomberg notes, the ECB bought into the 800 million-euro Steinhoff Europe AG bond in July, the same month the note was issued. It is also distinctly possible that the ECB bought the bonds directly from Steinhoff, bypassing the secondary market directly and monetizing what would soon be "half off" paper.

The Steinhoff notes are among the about 129 billion euros ($152 billion) of corporate debt bought by the ECB since June 2016 as part of efforts to "spur the euro-zone economy". Little did the ECB know that one of its purchases would soon become its most prominent land mine.

While the central bank has limited its risk by only acquiring investment-grade notes, this will be cold comfort now. Incidentally, this reminds us of a question we asked on March 10, 2016, the day the ECB announced its CSPP program: "It is unclear what happens to those IG bonds that the ECB has purchased if and when they get downgraded to junk" which is precisely what is about to happen to Steinhoff bonds.

Furthermore, while there’s no obligation for bonds to be sold if they’re downgraded to junk, according to published guidelines, it is especially unclear what happens if - or rather when in the case of Steinhoff - a company whose bonds the ECB has bought files for bankruptcy, and the debt becomes equitized: this would force the ECB to hold equity in a post-reorganized company, something the ECB has no mandate for. What happens then?

For now, Moody’s rates the Steinoff 1.875% notes Baa3, its lowest investment grade. The bonds will soon be downgraded to junk.

Meanwhile, the ECB's monetization of all European debt continues apace, and as of last Friday, the ECB held over 40% of Europe's GDP on its balance sheet.

And while the chart above is the main reason why credit spreads have never been tighter and corporate bond yields, lower, it is also the potential time bomb that threatens to crush up the ECB's credibility once more Steinhoff grenades blow up. And blow up they will: according to the latest breakdown of ECB holdings by UBS, the central bank now owns 26 "fallen angel"-equivalent bonds with a junk, or BB+ rating, amounting to €18 billion in notional debt.

 

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hedgeless_horseman's picture

 

"It is unclear what happens to those IG bonds that the ECB has purchased if and when they get downgraded to junk" which is precisely what is about to happen to Steinhoff bonds.

Mario should have bought real quality, like Illinois AAA.

http://www.zerohedge.com/news/2017-12-05/nearly-insolvent-illinois-just-...

38BWD22's picture

 

 

Scandals and swamps in Europe too?  Who'da thunk it?  Must be the human condition...

Prepare!

rmopf2010's picture

Torches and pitchforks and ropes to hang that italian cockroach

Joe Davola's picture

If they get to 100% of the EU's gdp on their books, is that effectively socialization for all?

American Psycho's picture

Cost average down??  Come on Mario, back the truck up.

BaBaBouy's picture

Bitcoinz/Blockchain Would probably take care of this MASSIVE Corruption State...

Deathrips's picture

ECB is fraud!

 

Insolvency revealed.

 

RIPS

BennyBoy's picture

 

Even in Euroland there's a sucker born every minute.

BlindMonkey's picture

What do you expect from human cattle that have no problem with 50% tax rates?

knukles's picture

SCANDAL?  WHAT SCANDAL?

Several years ago Magic Mario and his band of Merry Fuckups changed the rules allowing the ECB to buy crap debt to help out the yadda yadda yadda
There is no scandal.
Only repercussions to bad decisions

Like free speech.  It comes attached with free consequences,

maneco's picture

And the write down of Steinhoff 2025 bonds has only impacted the ECB's assets by -0.000125%! "All is well with our balance sheet as we have diversified into a whole lot of crap." says Mario Draghi.

Augustus's picture

A few busted corporates are meaningless.

It is the busted government debt that will gut the ECB.

Tapeworm's picture

In the Free country of the USA I pay far more than half in taxes.

 Try running a small manufacturing business making stuff that needs machines of 20,000  Lbs to 180,000 lbs.

 Hint; they are not portable.

hongdo's picture

I've wondered that for a long time now.  Buy the means of production with money from thin air.  But not socialization as "the people" do not own the Central Banks which own everything.  The private banks own the Central Banks - except for some shares in some banks.

Big Twinkie's picture

It's funny how the entire world is in debt to the banks who produce nothing.

YUNOSELL's picture

If the ECB was not allowed to invest in companies that conducted some sort of criminal activity, then it would be extremely limited in the bonds it could buy

eclectic syncretist's picture

How the fuck can a central bank (like the ECB) buy bonds when it doesn't have any money? If it's imagineering or counterfiating money to make said transactions titty-phobic Draghi and all the rest of his cronies over there should be shipped off to a re-opened French Guiana prison.

Erek's picture

Devil's Island - a wonderful place for all these satanic assholes.

GoldenDonuts's picture

Apparently you didn't watch the Flintsones as a kid.  In one episode Barney Rubble printed money and bought whatever he wanted.   That is exacly what the ECB, Fed etc etc etc are doing.  Soon they will own everthing for nothing.

GunnerySgtHartman's picture

More proof that central bankers know nothing about everything, yet they claim to be the saviors of the world.

shizzledizzle's picture

That's a spicy meat-a-ball Mario!

pound the vix's picture

This is the problem.  All the central banks are starting to buy Private investments instead of public debt.  How easy is it to buy your buddies corporate bonds when the company he is running is failing.  We can't Audit the Fed.  So who knows how many friends and family they bailed out in 2008.

hedgeless_horseman's picture

 

...starting to...

Since 1913.


spanish inquisition's picture

Money printing to keep things propped up.

Peacefulwarrior's picture

Public Debt = Lama Dung... they don't want any

yogibear's picture

Just keep front-running the central banks.

They keep buying everything that fails and putting it off-books.

any_mouse's picture

"South Africa's culture of corporate corruption"

Elon Musk is South African. Hmm.

Canadian Dirtlump's picture

Illuminati / Flat Earth confirmed.

Iconoclast421's picture

That's why it is called money printing. If you print money to buy bonds, and the bonds are in fact worthless, then you just naked printed money. Unbacked emission of fiat.

rmopf2010's picture

in honor to forum fellow who says:

Death to the fucking Money changers

resistedliving's picture

if the circular firing squad re-loaded faster this would still be under Draghi's rug (toupee)

When The Levee Breaks - YouTube https://www.youtube.com/watch?v=FFDYuO53BUk
CHX13's picture

"Stabeeleetee..."  ...oh the farce, but not really a surprise. This train wreck has just started. 

wisebastard's picture

i guess the bankers cant get enough fruad....its their only business model.....

buzzsaw99's picture

that $800M really helped the economy of that poor poor south african billionaire.  wtg mario.

maneco's picture

....and it kept Poundland open here in the UK for the sheeple!

richdemetri's picture

I wanna sell some bonds, how can I do that??????

rmopf2010's picture

Draghi, Mario +39 06 666 666 666

scintillator9's picture

Why do I feel like this is late 2007, and / the movie The Big Short is playing in real life right in front of us all?

hooligan2009's picture

The ECB should immediately lend a small amount - say 200 billion euros to Steinhoff in exchange from for unlimited draghi draghi bunga bunga.

remember - this is what Draghi and all central banks are doing (guess who is in the audience - clue - begins with Goldman and ends with Sachs.

https://www.youtube.com/watch?v=jZ572yLH9sc

Gussiefink-nottle's picture

The huge quantitative easing program that the ECB has run for the last few years means it holds all sorts of crap on its balance sheet. It won't be long before the markets lose all faith in this uncollaterised organisation.

maneco's picture

Let's pray the ECB's balance sheet goes to zero!

Ink Pusher's picture

"It is also distinctly possible that the ECB bought the bonds directly from Steinhoff, bypassing the secondary market directly and monetizing what would soon be "half off" paper."

I'd say it's far beyond a "possibility" ,just the stench of it has me calling it at about  a 75 to 80% probability.

Soph's picture

There's an impressive amount of junk showing on that ECB bond ledger.

They're the "smart" money, right?

csmith's picture

No need for "smart" when you have an unlimited supply of it.

Paul Morphy's picture

How much of the rest of the bonds purchased by ECB, BOJ, Fed, Swiss National Bank, is shit?

 

Greaseball cocksucker Draghi should be hung draw and quartered. Guinea.

SmittyinLA's picture

Where is the ECB chart and graph?

milking institute's picture

Just ordered a months supply of pop corn,who needs cable when you have a endless string of horror movies for FREE,can't wait for the next episode...

Stormtrooper's picture

800 million.  Seriously now.  Draghi doesn't even need to call anyone to fill that gap.  He can just open his briefcase and pull out his portable printer.  In 5 minutes, POOF, 800 million (plus an extra 100 million for lighting cigars).  When does this thing become serious?