Edcon Holdings needs debt overhaul

Yields on the clothing merchant’s callable June 2019 euro-denominated notes jumped to a record 66,3%, climbing more than 25 percentage points over the past three months, according to data compiled by Bloomberg.

The $501-million of bonds issued in November 2013 are the worst performing of all high-yield corporate securities this year, the data show.

South Africa’s biggest non-food retailer, owned by Bain Capital Partners since 2007, is struggling with rising interest costs and waning financing opportunities as high inflation and unemployment of more than 25% hurt consumer spending.

The Johannesburg-based company says in November that it lost R1,1-billion in the six months through September 27. It owes almost R2-billion rand in debt payments this year, according to data compiled by Bloomberg.

“There’s too much debt and Edcon is going to be under pressure,” says Conrad Wood, head of fixed income at Johannesburg-based Momentum Asset Management.

“This year’s interest payments are a strain on the balance sheet. The general consensus in the market is that the balance sheet isn’t sustainable.”

Edcon spokesperson Debbie Millar declined to comment before its planned quarterly results announcement next month. Bain, a Boston-based private equity firm, also declined to comment.

“There is not enough value in Edcon for a listing, the debt load is too high and the profit is too low,” Jean Pierre Verster, a money manager at Johannesburg-based 36ONE Asset Management, says in an interview on January 8. “There will have to be a restructuring of debt or a breakup of the group.”

Approvals for shoppers wanting to buy on credit at Edcon’s stores have fallen by about 50% since Barclays took over the retailer’s lending facility in 2012.

Efforts to find a second provider of credit have been unsuccessful, Edcon says last year. Debt was 8.2 times earnings before interest, taxes, depreciation and amortisation in the fiscal second quarter through September, compared with 6.7 times a year earlier, the company’s figures show.

“Edcon is not facing imminent refinancing issues as its closest maturing bond is April 2016,” says Bronwyn Blood, a money manager at Cape Town-based Cadiz Asset Management

“Its longer-dated 2019 security indicates that its current capital structure is not viable and the company would need to look at some form of balance-sheet restructuring aimed at reducing debt levels.”

The 2019 bonds were priced at 26.56 as of 08:05 in Johannesburg.

“Operationally Edcon is still profitable,” Blood says. “However, this is not sustainable as large debt levels will need refinancing at interest rates that Edcon cannot afford.”

The company, bought by Bain for about R25bn, operates chains including Edgars, Red Square, CNA and low-cost Jet. Selling one of these units might be considered, 36ONE’s Verster says.

“A break up won’t be good for debt holders and it could be another negative development for our credit markets affecting the international community’s view of South Africa,” he says.

Source – Bloomberg

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