February 8, 2018 / 12:49 PM / a year ago

LPC-Banks sell out of Steinhoff, as hedge funds snap up paper

LONDON, Feb 8 (Reuters) - Banks are selling out of their exposure in troubled South African retailer Steinhoff with Natixis being the latest bank to sell out completely, and hedge funds are proving to be willing buyers of the paper, banking sources said.

Natixis sold out of its approximate US$110m-equivalent exposure in Steinhoff, which is fighting for survival after discovering accounting irregularities in December that triggered an 85% share price slide in the group and a raft of changes in its boardroom and leadership.

The Natixis loans were sold in an auction process in Europe’s secondary loan market and fetched good levels. The sale has prompted other banks to sell out of their positions, the sources said.

The Natixis loans were spread across several tranches including US$35.7m of TLB1; US$35.7m of TLB2; and US$35.7m of TLB3, denominated in a mix of euros, sterling and dollars and these sold in the mid-70s, according to traders.

A US$3.57m of RCF sold in the mid-to-high 60s, the traders added.

“It is surprising the levels they got because of the size of the sale and the rumours of more coming imminently which has now materialised – there is a lot of paper there for people to digest,” a trader said.

A level in the mid-70s for the term loans is seen as being high, given the risk profile of the business. If Steinhoff enters administration it is likely to sell off its divisions at a steep discount, several sources said.

The Natixis auction, which took place on Wednesday, attracted a number of hedge funds competing for the paper, sources said.

Citi bought the paper on behalf of a number of hedge funds, one of the sources added.

“The hedge funds are taking a view that the fraud isn’t as bad as it first seemed and that they expect Steinhoff to survive medium term with an orderly process for selling off the businesses,” the trader said.

Citi declined to comment. Natixis was not immediately available to comment.

Natixis is the latest bank to sell paper in Steinhoff, following a number of other European and US banks de-risking their exposures. JP Morgan sold around US$60m of Steinhoff term loans this week, fetching around 73% of face value.

Other positions sold include a €27.5m block of Schuldschein loans and a €25m block of Steinhoff’s RCF from an Austrian bank last month.

Buyers have included major hedge funds such as Taconic Capital, Blackstone, Centerbridge and SVP, sources said.

“More sellers emerge and the funds are still bidding — they see value so the paper is fetching good levels. Steinhoff is a sizeable, stressed situation which you could take a positive view on,” a second trader said.

“It also comes when there is a lack of other sizeable distressed situations and that helps it to trade well. Large hedge funds have raised big money for distressed assets and they have to put that money to work — maybe Steinhoff is not the worst place to put it.”

Two more auctions of Steinhoff are due on Thursday. The first at 1pm London time includes US$35.7m of TLB1; US$31.4 of TLB2; US$31.4 of TLB3 and US$12.2m of RCF. The second auction at 4pm includes US$15m of TLB1; €125m of 2020 Schuldschein; and €40m 2022 Schuldschein.

“It seems like everyone is selling out now,” the first trader said.

Editing by Christopher Mangham

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