Bonds Issued by Acquirer of Mattress Firm & Sherwood Bedding Collapse after ECB Buys Them as Part of QE

Steinhoff’s “accounting irregularities” crush its stock.

If you’re holding shares or bonds of a company, such as Steinhoff International Holdings — which acquired Mattress Firm Holding in 2016, Sherwood Bedding in 2017, and a bunch of other companies — well, you don’t want to get this kind of corporate announcement, even if you’re the ECB that bought the bonds that Steinhoff’s European subsidiary had issued just this July:

The Supervisory Board of Steinhoff wishes to advise shareholders that new information has come to light today which relates to accounting irregularities requiring further investigation. The Supervisory Board, in consultation with the statutory auditors of the Company, has approached PWC to perform an independent investigation.

Markus Jooste, CEO of Steinhoff has today tendered his resignation with immediate effect and the Board has accepted the resignation.

After the press release of “accounting irregularities” appeared today, Steinhoff’s shares, which are traded in Frankfurt, plunged 64% in one fell swoop and closed at €1.07.

Investors have been smelling a rat for months: Even yesterday’s closing price of €2.95 was already down 41% from the €5-range in June.

And you don’t want to hold the bonds when this debacle happens. But being smart, you’re not holding the bonds, you sold them to the ECB, which has acquired them under its corporate bond purchase program that is part of its QE.

It would be funny if it weren’t so ugly. Steinhoff Europe AG issued the €800 million of bonds in July 2017. The bonds, with a 1.875% coupon, mature in January 2025. Moody’s rates them Baa3, so one notch above junk. Hence they were eligible for ECB purchases.

To keep its bond operations opaque for the public, the ECB doesn’t disclose by name what it buys, how how much it buys, or when it buys those bonds. But it discloses a list of its current bond holdings (you can download the list here and search it for Steinhoff). And voilà.

Those bonds were trading at over 100 cents on the euro shortly after they were issued in July, probably under the pressure from the ECB’s purchases. Today, they plunged 33% to 56.18 cents on the euro and are down 45% from mid-September!

Steinhoff became a powerful force on the acquisition circuit in 2016, acquiring nine large retailers and related companies, in addition to the retailers it already owned. In the US, it acquired Mattress Firm Holding in September 2016 for $2.4 billion and a majority stake in mattress manufacturer Sherwood Bedding in July 2017. It got to the point where Wall Street was asking, while licking its chops, “Who would Steinhoff buy next?”

But in addition to the “accounting irregularities,” perhaps designed to cover up some unpleasant issues, Steinhoff has some operating problems, according to Bloomberg:

Retail sales have been weak, and this Christmas — after a much better than expected festive season in 2016 — is looking grim. Add in higher input costs thanks to the slump in the pound, and that some rental payments are due at the end of December, and that could make for a toxic combination.

Moody’s, in rating the misbegotten bonds, wrote on July 13 with unintended irony:

A decentralized management model mitigates inherent risks associated with an ever evolving organizational structure spanning a number countries and business sectors with integrating multiple acquisitions. Management teams remaining post acquisition allows for a seamless transition and are aligned with group operating performance success through remuneration comprising a considerable long-term equity award component.

Now the ECB holds some of these bonds. It shows what risks the ECB is taking by buying corporate bonds. Though the ECB doesn’t buy junk-rated bonds, it buys bonds that are rated just above junk, such as the Steinhoff bonds, and it buys not-rated bonds of undetermined quality. Due to downgrades, it ends up with junk-rated bonds. The chart, based on data from UBS and Bloomberg, shows that the ECB recently held 26 issues of junk bonds (rated BB+ or below on Standard & Poor’s scale), 233 issues of not-rated bonds (NR), and 84 issues rated just above junk (BBB-):

But these are the boom times for euro corporate bonds and particularly junk bonds – boom times because the ECB has been buying these instruments, purposefully inflating their prices and pushing down yields. This scheme allowed a company like Steinhoff to borrow at a cost below 2%.

However, the average euro junk bond yield – currently at 2.5% according to the BofA Merrill Lynch Euro High Yield Index – is up sharply from peak bond-market benightedness in early November, when the average junk bond yield fell briefly below 2.1%. Investors are starting to wonder what will come next, as the ECB will further taper its bond purchase program. And the Steinhoff bonds underline how the ECB has become a “bad bank” of sorts, buying bonds from weak companies and watching how the bonds crash on its books.

The tax cuts and “elevated asset prices” are on the Fed’s table. Read…  The Fed Might “Surprise” Markets with its Hawkishness in 2018

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  46 comments for “Bonds Issued by Acquirer of Mattress Firm & Sherwood Bedding Collapse after ECB Buys Them as Part of QE

  1. B says:

    While the ECB might carry some meaning to some people, it does not work for the people. Hence it is an intermediate step in an attempt to transition to a global currency since it’s actions like these which show the ECB to be neither a safe haven nor responsible. The question remains whether countries can muster the strength and resolve to stand once again on their own currency or get gutted eventually when the planetary regime takes hold.

    • cdr says:

      Agree the ECB would love to offload their obligations like Greece dumped on the ECB. Won’t happen. Nothing but ugliness ahead for the Eurozone. Bigger danger would be for EU to build an army and go after others to plunder their assets to pay for ECB excesses of today. If they start hectoring Russia, consider that a first step.

    • van_down_by_river says:

      What’s the big deal? Draghi’s entire balance sheet can (and probably will) become worthless – no problem because no one had to work to earn those Euros. No one has any skin in the game so no one loses. Eventually people will lose confidence, pish, pish you can always start again with a new Euro.

      The Germans are asleep at the wheel and get what they deserve – the mother of all inflations. History rhymes once again. The beauty of getting something for nothing is there are never any consequences – yeah!!!!!

      • Joan of Arc says:

        You are correct van, the ECB can buy up all the bonds and private debt and then forgive it all in a kind of jubilee since the electronic money was created out of nothing. So, it does not matter if they choose to hold the loans and the loans all go bad, it is the same as forgiving them. What all central banks should do every 50 to 100 years is forgive the mortgages of one house per family, the car loans on two cars per family, credit card debt of up to $50,000 per family, all student loan debt, and finally, all Local, State, and Government debt. That would lay the foundations for another long term economic period of prosperity. Unfortunately, the economic system will most probably go down in the ugliest way possible for the greatest amount of people. The Republican party, that controls the government through the House, Senate, and Executive Branch, is writing a tax bill that favors the 500 billionaires in the US at the expense of, and on the backs of, the 99% who will eventually see their taxes go higher along with their medical bills. The President’s family will reportedly make over $1 billion from his tax bill. The country has a government that is effectively an Oligarchy controlled by 500 billionaires who effectively control the 500 largest corporations and businesses.

        • Ricardo says:

          Forgiving debt on the jubilee year is part and parcel of law in the old Testament of the Bible so it is nothing new except in the modern world where greed rules.

        • van_down_by_river says:

          It’s all just a game played with numbers electronically stored in computer memory. Money has value because people have confidence others will accept it in exchange it for goods and services, but central banks are tinkering with that confidence – they are testing the bounds of how much they can print without breaking confidence. I believe they have already crossed the line and there is no turning back – the dam of inflation is cracking and will soon break with devastating consequences. After central banks have destroyed the monetary system people will lose their motivation to work for worthless money. It took someone with Bernanke’s self described courage to destroy the money system to bring it all down (Greenspan pushed the envelope but always got cold feet) – now it’s happening.

    • Ppp says:

      I don’t know why more people don’t understand this, but central banks have become the new bankruptcy court, as well as the new welfare agency. We are all living on the money they provide in the form of bond purchases. That they would even think of tapering, says one thing: the world economy is dead.

  2. Maximus Minimus says:

    The usual modus operandi for a failing company is to mint it’s own coin. Stein-coin (stone-coin) sounds quite solid, actually.

  3. chris Hauser says:

    moodys says

    A decentralized management model mitigates inherent risks associated with an ever evolving organizational structure spanning a number countries and business sectors with integrating multiple acquisitions. Management teams remaining post acquisition allows for a seamless transition and are aligned with group operating performance success through remuneration comprising a considerable long-term equity award component.

    which means they are substantially aligned with the banana peel.

    the only downside is that the marginal buyers are dwindling……

  4. Nick Kelly says:

    800 hundred million euros? Jees. That’s a bunch of mattresses. That’s the kind of number you associate with bailing out an Italian bank or two.
    I feel Junker’s eyebrows raising.

    • Wolf Richter says:

      I think there’s a “hundred” too many in your number :-]

      • Nick Kelly says:

        The head of the German central bank would have had a heart attack if that typo had been in the original.

      • Nick Kelly says:

        ‘The European Central Bank has spent about $129 billion buying corporate bonds as part of its Asset Purchase Program’

        Just looked this up. My God they could have just given every family in the EU over a thousand dollars! More if you target it just a bit by eliminating Germany. Then it would circulate and help create the inflation they say they want.

        If you are going to do ‘helicopter money’ at least do it over land.

    • van_down_by_river says:

      Your awe of the large sum of $800 million Euros will seem quaint in a few years when it will no longer be sufficient to buy a Big Mac.

      • Anon1970 says:

        I still have a 20 milliard (billion) mark denomination German stamp from the hyperinflation era. It was probably issued in early 1923. My stamp album also has room for a 50 milliard mark stamp.

      • walter map says:

        Looks like it’s ratatouille for dinner again.

        Ruining Europe just to bankrupt one fast ‘food’ globalist may be too high a price. Others disagree. Fortunately Joel Robuchon is a genius who could probably make dirt cookies palatable. It’s the national dish in Haiti, well on its way to becoming an international foodie fad.

        Questions questions. Shouldn’t we be concerned that Markus Jooste received adequate millions for his retirement bonus? And did ‘accounting irregularities’ become a euphemism for ‘heinous financial crime’ only recently, or is that an old and respected tradition?

  5. Paul Morphy says:

    So the ratings agency give each corporate bond a rating.
    Tell me who rated “Steinhoff”?

    Can anyone really be surprised that a Central Bank, in ambulance chancing-mode, would purchase a bond that will not be repaid?

    How many other bonds – sovereign and corporate – have the Central Banks bought which will never be repaid?

    No accountability. No consequences.

    • Robert says:

      Well, you’re right all the way, Paul, because these Central Bankers, who are really private, are using taxpayer money and risking none of their own in buying these bonds. Britons who were scratching their heads as to the wisdom of Brexit should thank God that they have done so, and don’t have to go far to round up their own domestic miscreants. In England at least the law provides for confiscation of the assets of those who have committed treason.

      • c smith says:

        “…are using taxpayer money and risking none of their own in buying these bonds…” They’re not risking anything at all, as they can print in unlimited amounts. If half the porfolio fails, so what. They’ll make more. That’s the beauty and the ultimate PURPOSE of QE – to prop up every failing enterprise so every speck of risk in the system is eliminated. It’s working perfectly so far!!!

    • cdr says:

      Draghi is just a good soldier who kicks the can like the best of them. Expect more imaginative central bank finance from the ECB before he goes. The EU will change the rules as needed to accommodate the ECB and how it finances kick the can. Media will support. Money printing and negative rates pay lots of bills if nobody who matters cares.

      • van_down_by_river says:

        Putting an Italian in charge of your banking system and currency – what could possibly go wrong? (Well done Germany)

        Looks like his Goldman Sachs work experience is really coming in handy – those guys know how to value assets!

  6. Kent says:

    I think it has finally sunk into my slow brain what is going on. I’m not a conspiracy theorist, but:

    1. Company issues debt to consolidate a market to give it monopoly pricing power.
    2. The debt is purchased by “investors” who are either banks themselves, or more likely borrow the money from banks.
    3. The profits of the company are now used to make debt payments and now flow to the banks. Meaning little is left over for actual investment in production and people.
    4. And the bankers carry little risk because the monopoly pricing produces the money to maintain their cash flow and at worse, the central bank will step in an monetize the debt if it goes bad.
    5. All of the risk is carried on the shoulders of the shareholders and employees.

    Eventually, all important, profitable revenue streams in the world flow into the hands of the few people who own and manage the major banks. And the banks control the central bank and money creation.

    Imagine the move to charter schools and the privatization of the public education system in the USA. Imagine all public schools being laden with mounds of debt. You as a parent have to choose a school. But they are all expensive and owned by your local AAA Excellent Education Corp. All the competition has been bought up with bonds and debt.

    You now have a nice $500/month/child payment that you have to make. Maybe you can’t afford it, but your local bank is happy to give you another mortgage on your house. You have to prepare your children with a good education after all. Oh, and the debt is not dischargeable in bankruptcy.

    I bet this is why hospitals charge so much. It all makes sense now.

    • Anon2017 says:

      When a “Saturday night special” is brought into an American hospital, chances are, the hospital bill will have to be written off and so will the cost of the ambulance ride. We all get to pick up part of the cost through our own insurance and through our tax dollars.

  7. mean chicken says:

    Germans are eager to give their wealth away, it seems.

  8. Maximus Minimus says:

    In a completely unrelated news, Samsung Heavy Has Record Plunge on Share Sale, Loss Forecast.
    “Samsung Heavy Industries Co. plunged the most on record in Seoul trading after forecasting surprise losses and announcing a share sale plan, underscoring the bleak outlook for the global shipbuilding industry.”

    Samsung Heavy would not be in this position if only the Bank of Korea learned how to do QE; it could issue debt that would be snapped up by the bank.

    • van_down_by_river says:


      We’ll get to see who swims naked if the tide does finally go out. I think a lot of company CFO’s enjoy nude bathing these days.

  9. Karmababy says:

    I would be happy to see Mattress Firm go under as a result of this, their consumer policies were so convoluted. I guess what goes around…..

  10. Derek says:

    A column header of Haircut Category!

    Tells you all you need to know, huh?

  11. OutLookingIn says:

    A a …… and, it’s gone!
    Safe haven? No, not really. And just now, that other flavor of the hour safe haven, bitcoin, has suffered a wallet hack and $50 billion in bitcoins are gone!
    Gold to bitcoin ratio now sits at 10.2:1 So? Which has more value?
    A little over ten ounces of gold bullion? Or, one bitcoin? Kinda like investing in “safe” bonds! Oh yeah. Smooth move Mario.

  12. If 2008 proved anything its that the policy of not marking assets to their current market value works. If a company will eventually become solvent (they always do) then providing a liquidity cushion avoids the nasty repercussions of bankruptcy, or on a grand scale an economic bust. The fed calls its impaired balance sheet “deferred assets”. The Japanese invented “Zombie” banks. There is nothing in this world to discourage these people from floating bad debt indefinitely. 2008 only made them more self-assured, however as their policy becomes evident to speculators they push the limits of this open checkbook as far as it will go, and to that end the central banks must WITHDRAW liquidity, no matter how painful. The real question in this global monetary circle jerk, is who goes first?

    • Old Engineer says:

      I don’t see what can bring it down. They have found a way to print infinite amounts of money and avoiding inflation by limiting the distribution of the printed money to the banks and oligarchs. They can’t consume enough food, medicine, cars, etc. to inflate the prices. What they can inflate the prices of are the things they put their newly printed money in like stocks, bitcoin, etc.

      • van_down_by_river says:

        They have found a way to avoid inflation while printing infinite supply of money? I’m living in a van because I can’t afford an apartment. I make an income well above what is considered average pay in America, yet somehow housing has become a luxury I can no longer afford. What even counts as inflation anymore? The price of everything keeps rising but at least there is no inflation. So what is inflation? Inflation is a government statistic – doesn’t mean much to my life. Lies, Damn Lies, Statistics.

      • Ed says:

        Concisely put.

        The shareholder-first-and-last ideology supporting outsourcing and offshoring is the mechanism that makes this work for worldwide investors. It’s kept U.S. labor from insisting on the share of the profits it got in the mid-20th century.

        I think that the very high percentage of GDP captured by investors will continue without a truly shattering disruption to the world economy.

        • Ed says:

          I think it won’t end well, but I also think the can could get kicked and kicked for quite a while. Why?

          The Central Banks and Congress seem to be on the same page. And the “populism” that won the White House is many things but it’s not economic.

  13. c smith says:

    How is this a problem in any way? The ECB can simply print more Euros, an unlimited amount in fact, and buy more bonds of dozens of failing companies if need be. Isn’t this just exactly the PURPOSE of QE?

    • Paul morphy says:

      Applying a liquidity solution to an insolvency problem, what could possibly go wrong.

      Because printing Euro 60 billion per month, every month, by the ECB, is imposing a liquidity solution to what is an insolvency problem.

  14. d says:

    Many of us complained about the Toilet paper Draghi was buying frequently through private placements, when he started.

    Our predictions are now starting to come true.

    The comment then was “what do you know you dont have the details”.

    Like we rally needed them.

    As another poster put it .

    Put an Italian in charge of the ECB dont be surprised when you get Mafia fraud problems

    • walter map says:

      There is no Mafia anymore. They all went legit and got honest jobs in finance and public service. Which is approximately what they did before they went legit.

  15. r cohn says:

    This is a tragedy for the workers bad for the suppliers,bad for the bondholders (although they were sucked in voluntarily by the ECB),but irrelevant for the ECB ..They created money out of thin air.So what if they lose it.

    The yield on Junk bonds in Europe recently reached a level equal to the US 10 year bonds.Would this have happened without the ECB. Anyone who thinks so is delusional.

    And is Steinhoff’s credit really any worse than Italy or Spain .If the ECB stopped buying bonds issued from those countries ,their bonds would also collapse.The ECB may have so called rules restricting what they can buy.,.but the Steinhoff case proves that these rules are also irrelevant

    And lets go further .What relevance are deficits as long as the ECB keeps on buying bonds without regard to true credit risk.
    And even further.If deficits are irrelevant,then taxes are also irrelevant,so taxes should be eliminated.

    The reason for the world wide rally in equities this year is the huge (over 2 trillion) of liquidity injected by the ECB,the BOJ and the bank of China.The FED may be tightening ,but their actions are very small in comparison to the actions of foreign central banks.

    As long as investors retain confidence in the funny money scheme,the charade can continue.

    • walter map says:

      “The reason for the world wide rally in equities this year is the huge (over 2 trillion) of liquidity injected”

      It’s a good thing equity prices no longer need the support of the real economy. Otherwise the FIC would also be in a great recession, just like everybody else.

      The real economy still plays a role, of course, so long as it can still be bled. Once that’s done the FIC will need new sources of plunder.

  16. Charles says:

    I think ECB print and buy as it wants for the time being because the euro is a reserve currency people are using as a store of value. These guys are allowed some mistakes in their purchases unlike 3rd world countries that don’t have this luxury because the citizens don’t believe in their own currency.

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