Renee Bonorchis and Janice Kew
EDCON Holdings’ bondholders are signalling the local retailer needs a debt overhaul.
Yields on the clothing merchant’s callable June 2019 euro- denominated notes jumped to a record 69.6 percent yesterday, climbing more than 25 percentage points over the past three months, according to data compiled by Bloomberg. The e425 million (R5.7 billion) of bonds issued in November 2013 are the worst performing of all high-yield corporate securities this year, the data show.
Edcon, owned by Bain Capital Partners since 2007, is struggling with rising interest costs and waning financing opportunities as high inflation and unemployment hurt consumer spending.
Debt payments
The firm said in November that it lost R1.1bn in the six months through September. It owes almost R2bn in debt payments this year, according to data compiled by Bloomberg.
“There’s too much debt and Edcon is going to be under pressure,” said Conrad Wood, the head of fixed income at Momentum Asset Management, which owns Edcon bonds among R80bn of assets.
“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 spokeswoman 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,” said Jean Pierre Verster of 36ONE Asset Management. “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 percent since Barclays Group’s South African unit took over the retailer’s lending facility in 2012.
Credit provider
Efforts to find a second provider of credit have been unsuccessful, Edcon said last year. Debt was 8.2 times earnings before interest, taxes, depreciation and amortisation in the fiscal second quarter to September, compared with 6.7 times a year earlier.
“Edcon is not facing imminent refinancing issues as its closest maturing bond is April 2016,” said Bronwyn Blood of 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”, she said.
“Operationally Edcon is still profitable,” Blood said. “However, this is not sustainable as large debt levels will need refinancing at interest rates that Edcon cannot afford.”
Edcon operates chains including Edgars, Red Square, CNA and low-cost Jet. Selling one of these units might be considered, said Verster.
– Bloomberg