Margin Debt, Backed by Enron-Déjà-Vu Steinhoff Shares, Hits BofA, Citi, HSBC, Goldman, BNP

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Wolf Richter,

“Shadow margin” is a hot business for brokers. Now they’re licking their wounds.

When the bankers of Christo Wiese, the former chairman and largest shareholder of Steinhoff International Holdings – a global retail empire that includes the Mattress Firm and Sleepy’s in the US – went to work on December 6 in the epic nothing-can-go-wrong calm of the rising stock markets, they suddenly discovered that much of their collateral for a €1.6-billion margin loan they’d made to Wiese had just evaporated.
Citigroup, HSBC, Goldman Sachs, and Nomura had extended Wiese this “securities-based loan” in September 2016. His investment vehicles pledged 628 million of his Steinhoff shares as collateral, at the time worth €3.2 billion. He wanted this money so he could participate in a Steinhoff share sale in conjunction with the acquisition of Mattress Firm and Poundland, essentially borrowing against his Steinhoff shares to buy more Steinhoff shares.
This loan forms part of the $21 billion of debt associated with Steinhoff that global banks are exposed to.
But that December 6, the shares of Steinhoff plunged 64% to €1.07 on the Frankfurt stock exchange after the company announced the departure of the CEO and unspecified “accounting irregularities requiring further investigation.”
Shares had been trading in the €5-range in June. In August, German prosecutors said they were probing if Steinhoff had booked inflated revenues at its subsidiaries, and shares started spiraling down. By December 5, the day before the plunge, they were at €2.95.
On December 7, Moody’s hit the company with a four-notch downgrade, well into junk. On Friday, December 8, Steinhoff cancelled its “private” annual meeting the next Monday with bankers in London and rescheduled it for December 19. Shares plunged to €0.47. Wiese stepped down as chairman.
Today, at that meeting with its bankers, Steinhoff said that it could provide neither details on the magnitude of the accounting problems nor updates on when audited financial statements could be published. In the presentation to the banks, Steinhoff begged for “continuing support” from its “creditors and other stakeholders” in order to get through this, adding that credit facilities were “increasingly being suspended or withdrawn by lenders.” The noose is tightening.
Its shares, after a dead-cat bounce in recent days, plunged 28% on Tuesday, to €0.46. And these shares have been pledged as collateral by Wiese.
This €1.6 billion loan formed part of the super-hot category of “securities-based loans,” or SBLs. These are margin loans and form part of stock market leverage, but they’re not reported, unlike the margin loans reported by the New York Stock Exchange. They’re also called “shadow margin,” because no one really knows how much there is.
They’re considered low risk by banks and regulators because stocks can apparently only go up, and because the collateral consists of publicly traded stocks, and thus is liquid. And this business has been booming in the shadows.
The original lenders of Wiese’s loan – Citi, Goldman Sachs, HSBC, and Nomura – have since sold pieces of the loan to several other banks, the Wall Street Journal reported, including BNP Paribas and BofA Merrill Lynch, which has the largest exposure. The Journal figured that for some of the lenders the losses on this one loan “could wipe out all revenue from stock-based lending this year.”

The losses these lenders face are so large because the downfall came so suddenly. Normally banks can make margin calls, asking for cash or more stock, to protect their position. With Steinhoff, the shares were worth 120% of the loan on Dec. 5 and less than 24% 48 hours later.

Today, these pledged shares would be worth €288 million or 18% of the €1.6-billion loan. But last week after the melee, lenders liquidated 98 million of the shares, or around 15% of the collateral. And now they’re trying to figure out what to do next. Any further selling is going to push the price down even more, but hanging on to them and waiting for better days might be even more costly, if those better days don’t materialize.
However this is going to wash out, it’s going to be costly for the banks. And it made the selloff worse, which is precisely what margin debt does. Margin debt is the great accelerator on the way up, and on the way down.
Margin debt in the US stock market, as reported by the NYSE, hit a record $561 billion at the end of October, up 16% from a year ago. But this is only the reported stock-market leverage, accounting for only a fraction of the total leverage in the stock market.
Securities-based loans – such as Wiese’s loan or myriad smaller loans made by brokers to run-of-the-mill clients – make up another large part of stock market leverage. These loans can be used to buy anything, including a vacation.
They’re called “shadow margin” because no one knows the overall magnitude because brokers are not required to report them. They’re low-risk loans if share prices continue to rise. And they’re still low-risk if share prices decline slowly to where brokers can liquidate the collateral and come out whole. But when share prices plunge, these loans can produce sizable losses, as the Wiese mess shows.
And there’s a broader context: Margin debt gets liquidated when shares decline past a certain level. When overall margin debt – including the shadow margin – is very high, as it is right now, these margin loans and the forced selling they trigger can turn a garden variety selloff into a major financial event.
$21 billion of debt. Off-balance-sheet entities. Moody’s wakes up, downgrades it four notches, with more to come. Read… Enron Déjà Vu? Citi, BofA, HSBC, Goldman, BNP on the Hook as Steinhoff Spirals Down


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