Steinhoff is one of the largest companies listed in South Africa, and one of the largest retailers in the African continent and has recently fallen under scrutiny. $12 billion of its market capitalization has disappeared, shares falling down 82%, amid accounting irregularities that may be on par with the likes of WorldCom. It’s CEO, Markus Jooste resigned immediately. PricewaterhouseCoopers is started an investigation; this probe has been confirmed on Friday November 8th. The company already has a lot of liabilities and if these were underreported or the costs of fighting this scandal are tough, this could be the straw that broke the camel’s back. With long-term liabilities over 12 billion euros and short term liabilities close to 6 billion euros, the company is not in good shape. It’s not just Steinhoff in trouble in this case, it’ll be the big consortium of lenders it had. These include Citigroup, Bank of America, HSBC, and BNP Paribas.
Deloitte is also looking to work with PwC on the matter, and needs information from the pending investigation to finalize its audit of 2017 financial statements. Among the strongest concerns in financial statements are: many acquisitions of shady companies that seem to turn around post acquisition, rampant equity raising, cash flow trends that do not correspond to operating profits, and senior executives that may have committed fraud. If these allegations hold to be true, they may be the biggest accounting scandal since Enron. There is a lot of parties at risk and on the line from major bank lenders, the company executives, as well as the 130,000 people the company employs. Already the company is in major trouble beyond the investigation with their debt downgraded to junk status, not something even the yield-hungriest of investors would want when there may be accounting discrepancies. Bonds due January 2025 saw its yield rise 443 basis points to 14.19%. Situations like these lead to a vicious cycle in which the company has to issue debt or liquidate assets to stay afloat, but is selling them at a deep discount and continues to do so. In fact, Steinhoff has already stated it will most likely need to sell assets up to 1 billion euros to maintain liquidity. This situation has also lead to a bit of a financial contagion, with Wiese at the helm of Steinhoff also saw other securities he has ownership in drop including Steinhoff Africa Retail and Shoprite Holdings. For now, the company is still under review and PwC in conjunction with the finance ministry of South Africa and Deloitte will try to figure out what is going on.