Renee Bonorchis, Janice Kew and Luca Casiraghi
EDCON, South Africa’s biggest clothing retailer by sales, may become a target for distressed-debt buyers after the price on the unprofitable company’s bonds declined to a record.
Edcon’s e425 million (R5.57 billion) of junior bonds due June 2019 had dropped to 22c on the euro last week from 38c at the start of the year, according to data compiled by Bloomberg, indicating investors expect to take losses on their holdings.
The bonds are the second-lowest in Bank of America Merrill Lynch’s Euro High Yield Index, behind only the subordinated securities of Heta Asset Resolution, the “bad bank” of failed Hypo Alpe-Adria-Bank International.
“Vulture funds without a doubt will look at it,” Arno Lawrenz, the chief investment officer at Cape Town-based Atlantic Asset Management, said, referring to mostly US-based funds that sometimes take control of companies by purchasing their debt. He does not own Edcon bonds. There is pressure on Edcon to be seen to be doing something, he said.
The company, owned by US private equity firm Bain Capital, needs to start repaying about R4.7bn of debt denominated in euros, dollars and rand next year, with another R20bn due by 2019.
Edcon, which has more than 1 500 stores across fashion chains including Edgars and Jet, is also cutting jobs to try to end a run of 12 consecutive quarterly losses.
Edcon was cut one step to seven levels below investment grade on September 30 by Standard & Poor’s, which cited its “substantial debt” and declining sales on credit. Moody’s downgraded Edcon’s global-scale corporate family rating on January 21 due to concerns about its ability to manage debt and sustain its capital structure.
Struggling
The company is “assessing ways to improve the capital structure”, spokeswoman Debbie Millar said in response to questions. “I’m not aware” of potential buyers for the company, she said. Bain declined to comment when contacted.
Johannesburg-based Edcon is struggling under the burden of debt following the R25bn buyout by Bain eight years ago.
The retailer’s net debt jumped 10 percent to R21.7bn last year, the company said.
“Edcon would make a good target for a foreign fund,” Kyle Rollinson, an analyst at Avior Capital Markets, said. “It holds some of the best space in South Africa, it has great brands…, but has missed on strategy because of its debt noose.”
South African shops are facing lower consumer spending after the economy grew at the slowest pace last year since a 2009 recession and unemployment was 24.3 percent in the three months to December.
“I won’t be surprised if Edcon restructured in the next couple of months to take out uncertainty in the marketplace,” Asief Mohamed, the chief investment officer of Aeon Investment Management, which does not own Edcon bonds, said. “Bain would be in a much better position to refinance now than leave it to the last minute.” – Bloomberg