Johannesburg - South Africa’s largest clothing retailer, Edcon, has finalised the restructuring of its debt, resulting in the reduction of the debt from R26.7 billion to about R7 billion.
The company on Thursday said the development would enable it to shift its focus from debt reduction strategies to improving the operational performance of the ailing retailer.
The owner of Edgars, Jet and CNA said it had obtained all the necessary approvals for the restructuring with lenders, who include various banks and investment firms, having already approved the move.
Edcon chief executive Bernie Brookes said: “The repairing of the group’s debt position has been a monumental initiative that has taken many, many hours of work to ensure its eventual success.”
US private equity firm Bain Capital last year handed ownership of the group to creditors in a debt-for-equity swop meant to reduce Edcon’s debt burden.
Brookes, who has been at the helm of the company since September 2015 and was tasked with the responsibility of turning it around, said Edcon had two burning platforms - the debt position and the internal restructuring to ensure improved profitability and future growth.
“The internal restructuring process remains in progress and is well advanced throughout the group.
“We are already seeing benefits at store level, in technological improvements, customer care, and ensuring that our employees are better informed, trained and remunerated. We expect these and certain other new initiatives to be continued to be rolled out for the next year, before we start seeing anticipated and meaningful benefits,” said Brookes.
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Chris Gilmour, an analyst at Barclays Wealth & Investment Management, said while it was too soon to assume that Edcon was out of the woods, the reduction of the debt was a major step.
Gilmour said this would allow the company to focus on operations.
“But this could not have happened at the worst of times. Consumers are under immense pressure.
“On the other hand, competition in clothing retail has intensified with the entry of (fashion retailer) H&M and (clothing and accessories retailer) Zara. These are international brands which are way ahead of the bend. They have good supply lines and global distribution systems. Because of that, they can sell clothes cheaper.”
Gilmour said despite this, there were still aspects that worked in Edcon’s favour, including its size in the country’s clothing retail market.
He said, while there was potential for Edcon to improve its performance, doing so amid fierce competition and subdued consumer spending would be hard.
“They are still, by far, the biggest clothing retailer. They can build on that. But the question is whether they can claw back market share. To do that, they need to focus a lot on promotional activities. You need the right merchandise at the right price. That goes back to logistics,” he said.
In its latest annual report, Edcon said the 2016 financial year was challenging, primarily due to an increase in income taxes, rising unemployment, rising interest rates, drought-induced rise in domestic grain prices and sustained weak rand exchange rate. The various factors affected the growth of household income as well as consumer confidence, which declined to its lowest point in 14 years.
The debt restructuring took place as the group was seriously considering various options to improve its liquidity position. These included asset disposals.
Edcon said, without the restructuring, its cash uses were projected to exceed cash from operating activities in the 2017 financial year. “If our cash requirements exceed the cash provided by our operating activities, we would look to our cash balance to satisfy those needs, which will likely not be sufficient in the near term (not taking into account the implementation of the proposed restructuring).
“Our existing facilities are fully drawn.
"Current credit and capital market conditions combined with our recent history of operating losses and negative cash flows, as well as projected industry and macroeconomic conditions in South Africa, may restrict our ability to access capital markets in the near term and any such access would likely be at an increased cost and under more restrictive terms and conditions than the ones of our current debt.”