Steinhoff - CPU Sequencing
All,
Please find our updated model of Steinhoff here.
The update primarily concerns the entity priority model and ultimately more accurately calculates the CPU pay-out at NV level, as well as overall pay-out scenarios depending on sequencing of the pay-outs from Africa vs. Europe.
Sequencing:
- As per our notes in 2019 and since, the sequencing of pay-outs could play a role in the relative recoveries of Steinhoff loans at both SEAG and SFHG levels. However, while that used to be theoretical for a long time, it now deserves a closer look.
- The above said, our central scenario is a mix. The next pay-down could well come from an IPO of Mattress Firm, which would lead to a partial pay-down at SEAG. Once the Grand Settlement is agreed (remains its own assumption) Management will probably be looking to refinance the company to put it on a more sustainable path. If so, that would require the consent of all parties involved and therefore suggest a balanced calculation from there.
NV CPUs:
- As discussed with some of you, the CPU language at NV level sets a Recovery Date for when aggregate creditor recoveries for every loan have reached a point that piks more slowly than the underlying loan at SEAG for instance and is therefore lower. So the cut off occurs slightly earlier - particularly if Europe is the first to pay out.
- If Europe pays out first (all of it’s value - which is theoretical), then we see the SFHG loans recover fully, including their PIK. The SEAG A2s in that scenario struggle somewhat as their recovery from NV would be low, if not zero.
- If Africa pays out early, (all of it’s value - which is theoretical), then we see the the SEAG A2s benefit from their large claim size at NV, which hurts the relative recovery of the SFHG loans.
- Note that there are potentially some tricks to be played, which could increase the SEAG A2 pay-out if the SEAG A1 remains minimally outstanding. This could matter where the initial pay-out is all Africa.
Grand Settlement:
- There are few news to report since much of the matter has moved to the Supreme Court of Appeals in S.A. We remain very constructive overall, but the matter is understandably of supreme importance to the country and will take some time.
Fundamental:
- All assets: Pepco, Pepkor, Mattress Firm, Greenlit, … seem to be performing well coming (hopefully) out of the pandemic. We have not done incremental work on the underlying assets at this time.
Positioning:
- We remain long both SFHG loans for 5% of NAV each. As the only sensible option available, we are assuming that a version of the Grand settlement will ultimately be successful. Beyond that, the economics resemble a 100%+ PIK margin loan on mostly EM retailers exiting the pandemic. So momentum is very important - and its positive. Depending on which side pays out first, the SFHG loans have between 10% and 40% upside from current levels, which we find is the most attractive return profile among the differently positioned loans in the structure.
Please reach out to discuss,
Wolfgang
T: +44 203 744 7003