Nompumelelo Magwaza
EDCON was skating on thin ice as pressure mounted on it to service its debt amid a weak macroeconomic environment and beleaguered consumers who were becoming more tight-fisted, equity analysts said yesterday.
The retailer has been under the scrutiny of credit rating agencies including Standard & Poor’s (S&P) and Moody’s Investors Service.
Jean Pierre Verster, an equity analyst at 36ONE Asset Management, said Edcon had not reached its lowest point yet, if one looked at the price at which its bonds currently traded. This implies a reasonable chance that the retailer might default on its debts.
Verster said another challenge for Edcon was the financial state of the consumer, for which there was no expectation of an improvement in the near future.
Because of the high debt burden faced by Edcon, there was currently little value in the equity held by US-based equity firm Bain Capital, which bought the retailer for R25 billion in 2007, he added.
“This means that there aren’t any buyers around, even if Bain wanted to sell. Due to the enormous burden of the debt, there is a possibility that Bain will need to negotiate with some of the debt holders who might want to convert some of the debt into equity, which will dilute Bain’s holding in Edcon,” Verster said.
Moody’s was the latest credit rating agency to raise the alarm on Edcon’s ability to service its debt by placing its ratings under review for downgrade. The decision for a review reflected Moody’s concern over Edcon’s ability to proactively manage its debt profile and sustain its current capital structure amid the weakening operating environment in South Africa.
Last month, S&P cut the retailer’s debt to seven levels below investment grade, citing substantial debt and declining sales on credit.
Edcon is the largest clothing retailer in the country with over 1 300 stores in southern Africa. It boasts brands such as Edgars, Jet Mart, Boardmans, TopShop and Mango, among others. Edcon’s total debt was 16 percent to R22.7bn as of June 30.
Verster said Edcon’s bondholders would be anxious to see the retailer’s second quarter results, due to be released in November. “They are not at the point where they will… default on their debt, but should the tough economic environment persist the chances of them defaulting could increase.”
Verster said one lesson investors could learn from the deal was that borrowing in one currency to buy an asset in another currency was a material risk. In this case, Bain borrowed in euros to buy Edcon in rands, which was one of the reasons why they found themselves in this position.
Ron Klipin at Cratos Wealth said Edcon’s earnings before interest, tax, depreciation and amortisation were still in a good state. “They seem to be doing well in their stores, especially with the introduction of brands.”
He said Edcon needed to deleverage the debt side and somehow refinance via equity.
“This time last year, the economy was doing much better and consumer spending was more buoyant… The retailer’s debtors books were also in a healthier state,” he said. “The debt is a noose around Edcon’s neck at the moment and the only way out is to try and reduce the level of debt.”