Borrowing costs rise as Edcon refinances debt

Published Nov 19, 2013

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Janice Kew

Edcon’s borrowing costs are rising as the clothing chain, owned by Bain Capital Partners, seeks to refinance debt taken on in the buyout amid a slump in retail sales.

The parent of Edgars, bought by Boston-based Bain in 2007 for about R25 billion, said on Thursday it had sold e425 million (R6bn) of senior notes due in May 2019 with a fixed coupon of 13.375 percent. Proceeds would be used to refinance debt maturing in June 2015, it said.

Edcon’s euro notes sold in March 2011 yielded 8.8 percent at the end of last week. That compares with a 6.2 percent yield on UK-based clothing retailer New Look’s floating-rate euro-denominated debt due in March 2018.

Edcon had net debt of R19.6bn at the end of June, while its full-year debt-to-adjusted earnings before interest, tax, depreciation and amortisation was 6.2 times, the company said on August 22. The comparable figure for Truworths International was 0.01 times, data showed.

“With the kind of commitments Edcon has outstanding, they’ve had to go with this expensive funding,” Asief Mohamed, the chief investment officer of Aeon Investment Management, said. “The company is in a difficult position to try and increase sales growth while consumers are under pressure.”

Local retailers have reported weaker sales growth this year as rising unemployment and inflation combines with a 10-year low in consumer confidence. Retail sales grew 0.2 percent in September, the slowest pace since December 2009 and less than all 15 estimates in a survey of economists.

“This debt is expensive, but it’s a big amount and we thought it prudent to put it behind us now,” Debbie Millar, a spokeswoman for Edcon, said. “It was quite important to do this refinancing before the debt went short-term in June next year. With a six-to-nine month time line and a lot of uncertainty in the market next year, we decided to do it now.”

Alex Stanton, a spokesman for Bain at Stanton Public Relations & Marketing in New York, did not immediately return a phone message seeking comment.

Edcon’s debt has hampered its ability to invest in its stores and keep up with competitors including Truworths and The Foschini Group. Edcon, which owns chains including Edgars, Jet, CNA, Boardmans and Red Square, posted a net loss of R714 million in the three months to June, compared with a loss of R214m a year earlier. Gross profit rose 5.9 percent to R2.4bn.

Sales made on credit account for about half of Edcon’s total retail revenue. Truworths, which generates 71 percent of its sales in credit, said last week that revenue growth slowed in the 18 weeks to November 3.

South African bonds rose last week after Federal Reserve chairwoman nominee Janet Yellen signalled that stimulus would be maintained until the US economy improved.

Moody’s Investors Service kept Edcon’s credit rating at B3, or six levels below investment grade, on November 8.

The e425m bond sale “will improve the company’s liquidity profile by further lengthening its maturity profile”, Moody’s analyst Dion Bate said. – Bloomberg

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