Steinhoff : “Noise doesn't do any good, and good doesn't make any noise”

NB. This "cancels & replaces" is explained by a mistake written in Steinhoff's 2015/16 annual report on the amount of future operating lease commitments (we had downloaded the annual report before the rectification by the group). The amount of commitments is lower than previously and therefore has no impact on our positive investment-case on the credit. Adjustments to credit ratios based on the Moody's methodology are unchanged (only those based on the S&P methodology are corrected in this version). - Since the end of August, three corporate governance subjects (tax investigation, disputes with Andreas Seifert and transactions with a Swiss entity) have created market stress on Steinhoff, affecting both its shares and bonds. We explore these subjects in detail in this note to evaluate the potential risks for the group’s credit. It should be noted that this analysis is mainly based on public documents, press articles (in particular German, Austrian and Swiss ones). Our analysis is valid on the condition that the financial statements published by the group are correct. In this regard, note that Deloitte did not express any reservations about the group’s last full-year financial statements. Besides, Steinhoff denied any allegation that the group had received qualified audit reports on one of its subsidiaries. - We are maintaining our Buy recommendation on the 2022 convertible bonds (YTM of 4.6%), the 2023 convertible bonds (4.6%) and on the 2025 straight bonds (3.4%). - We think that the market overstates the risk associated to the three corporate government subjects, which would be limited, in our view, to a one-notch rating downgrade (potential downgrade from Baa3 to Ba1): the convertible bonds trade at yields worthy of the single-B category, while the 2025 straight bonds trade at a YTM similar to a BB- rated bond. In our sample of comparables, the average yield on BB+ bonds maturing in 2025 is around 2%. - The more severe reaction on the convertible bonds is also explained by a technical factor: the risk that they will exit some convertible bond indices. - In terms of seniority, bear in mind that the straight bonds are closer to Steinhoff’s European assets than convertible bonds, although the latter are closer to some property assets. - >