Steinhoff International: cash is missing

Steinhoff International, the scandal-hit retail conglomerate, provided a trading update on Wednesday. With an investigation into its past accounts ongoing, the financial information was largely limited to revenue figures.

Attention naturally focused on a statement by the company that the group's essential working capital “largely dried up as the access of our operating businesses to their banking facilities and other credit lines was severely constrained”.

The group also announced the potential for “additional material impairments” beyond the €6bn in assets it has already flagged as suspect. Further investigation is required, it said, to confirm and quantify the impairment.

What caught our eye, however, was a small but important change to the language concerning what may be missing: some of the company's cash.

Here's the relevant text:

The Group announced in early December 2017 that it is investigating the validity and recoverability of certain non-South African assets and the review of these assets has been included in the PwC investigation. These assets include certain loans, investments and historical cash equivalents and their value was estimated to be in the region of €6bn.

The update is the first since we pointed out that it was strange for an acquisitive company to have sat on a €3bn cash pile for years, raising the suspicion that some or all of the cash was not actually there.

The new language appears to have reinforced this suspicion, albeit obliquely. If historical cash equivalents are not valid or recoverable, then it would seem the amounts for cash & equivalents reported on Steinhoff International's balance sheets were overstated. It would imply cash is missing, or was never there in the first place.

Missing cash, or fake cash balances, would raise the stakes for all concerned. It is one thing for executives, directors, employees and auditors to miss transactions struck by a few bad actors to inflate asset values or manipulate profits.

Cash equivalents, on the other hand, are typically understood to be investments in short term securities that have high credit quality and are highly liquid. They could be scattered across a conglomerate's various operating businesses, but the existence of such securities should be straightforward to verify.

Historical cash equivalents might be taken to mean in the past, yet the €6bn figure was first mentioned in connection to an investigation into the 2017 figures, with the 2016 accounts subsequently withdrawn (the timeline is highlighted below). Even if the historical cash equivalents in question relate to 2015, they would serve as the basis for future balance sheet totals.

Unless lenders and investors have assumed the company is light on cash since December, chances of the company meeting all its outstanding obligations, and the equity having any value, have surely decreased.

On Thursday, the market capitalisation of Steinhoff International was just over €1.5bn. Debt in an €800m bond issue was trading at around 59 cents on the euro of face value, according to Tradeweb.

The group has said it is seeking waivers from European creditors from possible defaults in order to “create a window of stability” to consider strategic options and develop a plan to address the group's indebtedness in conjunction with its creditors.

-------------

Here's the evolution of the language in the company's statements, with our emphasis.

December 5:

The Supervisory Board of Steinhoff wishes to advise shareholders that new information has come to light today which relates to accounting irregularities requiring further investigation . The Supervisory Board, in consultation with the statutory auditors of the Company, has approached PWC to perform an independent investigation.

December 6:

The Supervisory Board has today given further consideration to the issues subject to the investigation and to the validity and recoverability of certain non-South African assets of the Company which amount to circa €6bn.

December 14:

The Company, on the advice of the independent committee of the Supervisory Board, has today formed the view that issues concerning the validity and recoverability of certain Steinhoff Europe balance sheet assets under scrutiny in the 2017 audit work, are also relevant to the 2016 consolidated financial statements.

December 19

In a presentation to lenders, there was this on slide 19 concerning cash flow forecasts:

Forecast position for each operating company is evolving daily

Uncertainty at Group level – many operating companies reliant on Group for working capital funding as a result of the Group’s debt structure / treasury function
Reduction or cancellation of credit insurance
Credit facilities increasingly being suspended or withdrawn by lenders
Cancellation of cash pools

January 31

In a presentation to the South African parliament:

We announced on 7 December 2017 that we are investigating the validity and recoverability of non-South African assets totalling some €6bn. We don’t know at this stage if this crisis could have been prevented. The PwC forensic investigation is ongoing and only once it has been finalised we will be able to publicly disclose the material findings, determine what went wrong and take steps against those responsible.

February 28:

The Group announced in early December 2017 that it is investigating the validity and recoverability of certain non-South African assets and the review of these assets has been included in the PwC investigation. These assets include certain loans, investments and historical cash equivalents and their value was estimated to be in the region of €6bn.

Follow the topics in this article

Steinhoff International: cash is missing

Promoted Content

Follow the topics in this article

Comments