Recently, Steinhoff Internationals announced the closing of 200 Mattress Firm stores around the US (acquisition just happened a few years ago in which they paid a 100%+ premium above previous day’s closing price). But debt binge financing has been utilized for the massive M&A spree.
This one probably won’t cause systematic shocks through the global financial market but one we need to observe the effects closely as public companies from all across the world is now borrowing against their own stocks, not tangible assets, as collateral aka HNA in China (10% majority holder of Deutsche Bank and Hilton Hotels and $50B USD due by June 2018)
Oversaturation of the mattress industry is one thing (hence why we have Casper and lots of competitors popped up in the past 8 quarters) is one thing given their relatively high margin and low inventory cost, but their parent company, Steinhoff International, is going through:
(1) Shady accounting scandals; realizing assets not on the actual book
(2) Debt borrowing has been fueled by using equity/stocks not tangible assets as collaterals aka domain effect of stock price falling and debt price increasing at the same time
(3) ECB bought their junk bond (kind of trapped right now as their QE also extended into private junk bond markets as well)
(4) Employed over 140,000 employees globally so this should be an interesting point given the first 3 points
Bear in mind stock-based debt financing is not officially recorded so this will be an interest point to follow as the pace of change is substantially faster than the bankruptcy route, in which it will take some time for the liquidation of assets. Stock-based financing will basically forced these banks to sell the stocks in exchange for assets to repay back part of the debt costs but at the same time will forcefully drag the whole equity market down with it, at least in the short-term. Stock-based debt financing won’t have the luxury of the “pause” or more time allowed under the regular bankruptcy route.
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