Steinhoff woes mount as Moody's downgrades retailer by four notches

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Cape Town - Moody's Investors Service downgraded Steinhoff by four notches to B1, and placed the global retailer's rating on review for further downgrade.

The rating agency said in a statement late on Thursday that it had downgraded the issuer ratings of Steinhoff International Holdings and Steinhoff Investment Holdings, and the senior unsecured notes rating of Steinhoff Europe to B1 from Baa3.

At the same time, Steinhoff Investment'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.

Moody's said the downgrade and review for further downgrade reflect the uncertainties and implications for the company's liquidity and debt capital structure following an announcement by Steinhoff's Supervisory Board on new information relating to accounting irregularities.

Steinhoff announced late on Tuesday the resignation with immediate effect of CEO Markus Jooste amid the accounting scandal.

STEINHOFF FALLOUT:

Shares in the company collapsed more than 80% in a two-day rout following the announcement, which included that it had approached PwC to launch an independent investigation into accounting irregularities, and that SA billionaire Christo Wiese would step in as executive chairperson in the interim following Jooste's resignation.

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, Moody's said.

The rating agency said its review will focus on the findings of Steinhoff's 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."

Moody's pointed out that Steinhoff's B1/Baa3.za ratings continue to reflect the company's large scale; business and geographic diversity; incorporation in the Netherlands with limited EBITDA exposure to South Africa; and 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 recognises 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."

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