Trouble at Kaufhof as credit insurer slashes risk cover for suppliers

We refer in this issue's editorial (page 4) to the demise of several previously prominent American shopping malls. Now there are ominous messages eminating from leading German department store retailer Galeria Kaufhof, which was bought two years ago from listed DAX company Metro by the Canadian group Hudsons Bay Company (HBC).

When we last reported on the company in April 2016, HBC had just announced a major investment programme for its Kaufhof division, with its 103 department stores and 16 SportsArena stores, many of which are trophy real estate properties in prime locations in Germany's biggest cities. More than 40 of the stores had been bundled into a subsidiary HBS Global Properties, a €4.5bn joint venture with top US retail REIT Simon Property Group.

All does not seem to be well at Kaufhof. Operating losses doubled in the first five months of this year to €50m, partly due to higher rents arising out of a complex financial transaction in which HBS bought much of Kaufhof in a form of private equity earn-out model which imputed higher valuations to the property assets when selling them to HBS Global Properties, in which HBS now only owns 63%.

The high rents are now threatening the entire business model for the takeover. HBS is reported to be trying to even raise the valuations of the properties to gain access to higher credit to help out the retail operations. These have been dealt a bad blow by credit insurer Euler Hermes, which has reduced its factoring on merchandise delivered to the Kaufhof chain by 80%. With the Christmas ordering season in full swing, this is very bad news for suppliers, who now face much higher risks in the event of liquidity problems, or even insolvency.

A report in the Süddeutsche Zeitung suggested that Kaufhof could expect trouble in its forthcoming bank loan examination by a consortium of German banks. A spokesperson for HBC was quoted as saying "We are in full compliance with our banking covenants. HBC and subsidiary HBS Global Properties, which own Galeria Kaufhof department stores, are also fulfilling all aspects of their lease agreements." Other reports suggest that Kaufhof has been losing ground to rival Karstadt, owned by Austrian wunderkind Renee Benko's Signa Holding.

Prior to the takeover of Kaufhof by HBC, a merger between Kaufhof and Karstadt had long been mooted in industry circles, in a bid to create a German Department Store group, with a unique standing on the German retail landscape.