Dineo Faku
RETAILER Edcon is going to be forced to sell some of its assets in order to meet its overwhelming debt obligations.
This warning in Edcon’s 2015 annual report released yesterday comes as a surprise as Edcon’s problems started when it was taken over by US Bain Capital in 2007 for R25 billion.
Now Edcon has about R25bn of debt. The company is also searching for a new chief executive as Jürgen Schreiber’s, employment contract is coming to an end next April.
“We may be required to sell assets or cease operations to improve our short-term liquidity and service our cash payments. Yet such asset sales may impair our ability to operate our business and compete effectively, which may depress the long-term value of our business. But such measures may be unsuccessful or only temporarily successful in improving our liquidity position,” the company said.
Revolving credit
Edcon has R387 million available for borrowing under its revolving credit facility at the year to March from R2.3bn in the previous comparative year.
In the year to March, retail sales were up by 2 percent to R27.5bn. Yet although cash sales rose 11 percent, credit sales fell 8 percent with struggling consumers unwilling to spend money they didn’t have.
Edcon said previously it had explored measures to help it compete more effectively on credit, but these have yet to yield positive results.
In addition the retail market continues to be impacted by consumers under pressure in a tough economic environment.
The company is weighing up options to improve the capital structure. The annual report comes as the company invited holders to a eR425 bond exchange with owner Bains in a bid to stabilise its capital structure and preserve value.
Independent analyst Syd Vianello, said the company was trying to buy time through the bond exchange. “It’s a hell of a sacrifice, and shows just how bad the situation is at Edcon,” Vianello said.
Edcon said protracted talks with lenders could jeopardise its business.
“If we fail to agree on a way forward with capital providers on a timely basis, any alternative we pursue, including a South African business rescue may take substantial time to consummate. A protracted business rescue process would also likely result in a large amount of negative publicity, which would harm our brand,” Edcon said.
“It is also likely that such a prolonged financial restructuring or bankruptcy proceeding would cause many of our suppliers to ship product to us only on terms that are unfavourable to us, or not at all,” the company said.
Edcon’s credit sales are under threat amid the reduction in the availability of credit under its existing consumer credit programmes.
“The continued inability or unwillingness of Absa to provide support for our private label store card programme may continue to result in a decrease in store card sales to our customers, which could negatively impact our overall sales given customers’ reduced purchasing capacity,” the company said.
Absa issues Edcon’s private label store cards to its customers and it receives a net fee for providing certain information technology and administrative services.