A Property Giant Falls in Europe --- Signa's Benko tapped into family dynasties and sovereign-wealth funds

"Rene Benko was a high school dropout and convicted criminal. But by 2018, he was at the pinnacle of global real estate.

His company, Signa Holding, launched a glassy, J-shaped skyscraper on the banks of the River Elbe in Hamburg, Germany. The design of the 800-foot tower resembled a chart showing exponential growth.

Hamburg's mayor, the future German Chancellor Olaf Scholz, lauded Signa's good reputation with banks when the city picked the developer to build the tower.

"Signa is financially strong," he said.

It wasn't.

Benko's sprawling, $30 billion empire of trophy real estate and department stores has imploded into the biggest property bankruptcy in Europe since the global financial crisis. The mess threatens to unleash significant losses on scores of lenders and investors and freeze developments in numerous city centers.

Stakes in Manhattan's Chrysler building, upscale British retailer Selfridges and sporting- goods groups in the U.S. and Europe face the block. Auctioneers are selling off Signa's bookshelves, doormats, 700-bottle wine collection and a diamond-shaped award for Europe's 2021 real-estate brand of the year. 

The Hamburg tower is halted -- leaving a 330-foot stump.

The unraveling marks a dramatic reversal for the self-made entrepreneur, who once lavished backers with hops on his yacht, a top-of-the-line Bombardier Global Express jet and trips to Signa's multiple Austrian hunting grounds, complete with a shooting guide on the company payroll.

Left tallying their losses are heirs to the Tetra-Pak and Peugeot family fortunes; billionaire Ron Burkle; and marquee sovereign-wealth funds from Singapore, Saudi Arabia and the United Arab Emirates. Dozens of banks lent money, including Citigroup and Swiss bank Julius Baer, whose chief executive resigned on Feb. 1 after the bank wrote off $700 million on loans tied to Signa.

Spokespeople for Citigroup, Julius Baer, Peugeot Invest, Singapore's GIC, and the UAE's Mubadala declined to comment. The others didn't respond to comment requests.

Insolvency administrators say they are still getting to the bottom of the group's corporate structure. But public filings, investors and former employees paint a picture of an empire that combined persuasive salesmanship with extreme financial engineering -- an unsteady foundation that crumbled when the low interest rate era ended.

In fundraising presentations, Signa told investors it was offering conservative, low-debt investments in iconic properties to be held for generations. Investors said they have since learned through Signa's legal filings the companies had far more debt than they knew.

Many were invested in discrete parts of the company, unaware of convoluted cross-investments and large amounts of borrowing across hundreds of vehicles.

An attorney for Benko said a list of questions sent by The Wall Street Journal contained "credit-damaging" and inaccurate allegations, but declined to provide specifics.

Some of Benko's associates disagree that Signa's structure was at fault, but rather see the implosion as a result of herd behavior by lenders. Former Austrian Chancellor Alfred Gusenbauer, who served on Signa company boards, told Austrian state radio in January that the group overextended in retail, draining cash, and that the European Central Bank told banks not to provide more financing.

ECB supervisory board chairman Andrea Enria has called that suggestion bizarre, saying Signa wasn't targeted, but rather part of a broader examination of banks' commercial real-estate exposure.

Benko, 46, was raised with modest means in Innsbruck, the quaint Austrian city nestled in the Alps. He was a star junior indoor climber and, at 17, dropped out of high school and began converting attic lofts, he has said in Austrian media interviews. He said he raised money from an heir to a gas station fortune, and quickly built up his business.

He ran into trouble in 2012, convicted of an elaborate scheme in which prosecutors said he commissioned a former Croatian prime minister to push Italian officials to help contest a tax bill on Signa-owned Italian properties.

Though the tax bill wasn't reduced and the court said money never changed hands, a judge called it a "model case of corruption," Austrian media reported at the time. Benko was sentenced to the equivalent of probation.

It could easily have been a fatal business blow. Such convictions are typically toxic in the eyes of the large lenders and major investors that fuel the market.

Instead, Benko trained his salesman skills at wealthy European families who could be swayed by his personal pitch, former employees said.

He met scions of one family fortune after another for dinners over glasses of Chateau Lynch-Bages, which sells for $200 a bottle, they said.

Officially, Benko wasn't in charge. Around the time of his conviction, he structured the companies so he was neither Signa's chief executive nor on its executive board, instead serving as chairman of an advisory board. But inside Signa, Benko made critical decisions and appeared indistinguishable from a normal CEO, former employees said.

Funds eventually rolled in from Switzerland's Falcon Bank and Ernst Tanner, the chairman of chocolate maker Lindt & Sprungli and from local Austrian lenders. Signa snapped up buildings in Vienna's historic "Golden Quarter" and department stores like Munich's Oberpollinger. Benko boasted Signa was second only to the Catholic Church in owning Vienna property.

One key to Signa's growing empire was a financial maneuver in which Benko's companies functioned as both landlord and tenant for department stores. This allowed Signa to reap outsize benefits by moving money from its department store business to its landlord business through hiked rents, former Signa employees said.

That extra rental income was worth far more in the landlord arm through what a former employee called "multiple arbitrage." Long-term leases instantly increase the value of properties substantially -- and investors tend to value income at landlords at more than 20 times annual proceeds. At retailers, where business is seen as more fickle, investors value it at less than half that. This allowed the real estate unit to borrow and raise investment based on the higher valuations.

High-profile acquisitions and the growing roster of wealthy backers helped Benko attract high-profile allies. Former Morgan Stanley Chairman Walid Chammah advised him on fundraising; Gusenbauer, the former Austrian chancellor, and a deputy chancellor both joined his board, and the Peugeot family invested.

Benko pushed into the U.S. in 2019 with a splashy purchase: Signa and a partner paid about $150 million for the Chrysler Building, giving each a 50% stake. Photos of the art deco skyscraper went up around Signa's offices.

As they grew, Signa's real-estate companies boasted high profits -- on paper, at least. Signa called itself "the best performing real-estate company in Europe" in a 2018 investor presentation

Between 2017 and 2021, the main real-estate unit, Signa Prime, had a combined 3.4 billion euros in profits, it said in Austrian corporate filings.

But all of Signa's profits over that period were from paper gains. Signa marked up the values of its own properties by 4 billion euros, meaning the company would have otherwise reported substantial losses.

In the same period, Signa Prime spent more on interest payments and dividends -- 1.9 billion euros -- than the 1.6 billion euros it received in rental revenue, an unusual situation for a large property owner.

Pushing up values was a key focus within the company, former executives said. Employees focused heavily on appraisals, giving rent projections and other evidence to outside appraisers in a bid to get high values, according to those employees.

Many investors and lenders relied on the outside appraisals. Dividends were based largely on property values, so higher values boosted returns.

Appraisers valued the company's office properties at 41 times the income they produced in 2021, corporate filings show. Comparable publicly traded office companies' property portfolios were valued around 20 to 25 times income, according to Green Street, a real-estate advisory firm.

Signa's figure "doesn't make sense for any portfolio," said Peter Papadakos, head of European Research at Green Street. "That's something I've never seen for listed office companies."

Rising paper values allowed Benko to boast of low debt ratios, hovering around 50% of building values, he told investors, according to presentations. That left a healthy buffer in case the market turned.

Some properties, however, had a layer of debt on corporate shells that sat between the properties and the real-estate company, which itself had numerous layers of debt.

Benko's 50% calculation typically omitted billions of dollars in liabilities that increasingly weighed on its finances. Called Genussscheine, a hybrid between debt and equity, it promised investors a share of any profits in a year from Signa companies or individual projects. Even though under German accounting principles it isn't technically categorized as debt, interest was steep.

As Signa grew and Covid hit, rents proved unsustainable at the department stores. In 2020, Signa's German department store unit filed for bankruptcy. To make sure the company would continue to pay the high rents that underpinned Signa's property values, Signa gave the unit a 200-million-euro lifeline.

Meanwhile, Signa needed money to fund dividends and an array of large developments started in city centers around Europe.

In December 2021, a unit of the Benko empire that sold bike and tennis gear went public by merging with a special-purpose acquisition company established by Ron Burkle's Yucaipa.

Signa joined with Central Group -- run by Thailand's Chirathivat family -- to pay $5 billion for Selfridges, the tony British department store chain known for ostentatious displays on London's Oxford Street. The Saudi Public Investment Fund helped fund the deal.

The empire wobbled in late 2022, when a triple whammy hit. Prosecutors in Austria raided Signa Holding's offices as part of a sprawling probe into alleged government corruption. Galeria, Signa's flagship German department store, filed for insolvency in October 2022, after limping for years. And the sports arm called on Benko for hundreds of millions of dollars in emergency money because of plunging sales.

Signa wasn't able to find a loan crucial to paying for the rest of the Hamburg skyscraper that was under construction and stopped paying its contractor." [1]

German Chancellor Olaf Scholz has remarkably bad luck. Everything that he supports is doomed. First Signa goes down in flames, second - Ukraine. What is next - Germany? If you make a turn (he says Wende), you have to be sure that the ground is not slippery. Otherwise you start skidding to catastrophe.

1. A Property Giant Falls in Europe --- Signa's Benko tapped into family dynasties and sovereign-wealth funds. Brown, Eliot; Margot, Patrick; Putzier, Konrad.  Wall Street Journal, Eastern edition; New York, N.Y.. 09 Feb 2024: A.1.