‘Vulture funds’may be eyeing Edcon
A truck driver does all he can to transport a load of corn husks on the road between Mogadishu and Afgoye, in Somalia IT was South Africa’s flagship private equity deal in 2007, but now it appears to be on the skids.
Edcon, the country’s biggest clothing retailer, was bought by private equity company Bain Capital in 2007 for R25-billion.
But the crippling debt heaped on the company to make the deal happen has almost paralysed it — to the extent that it may now become a target for buyers of distressed debt.
This week, the price of the bonds taken out to finance that 2007 buyout fell to a record low — an indication that investors expect to take losses on their money.
Edcon’s million (about R5.5-billion) of junior bonds, due in June 2019, had dropped to 22c on the euro last week from 38c at the start of the year. Edcon’s bonds are now the second-lowest in Bank of America Merrill Lynch’s Euro High Yield Index — they are only better than the subordinated securities of Heta Asset Resolution AG, the “bad bank” of failed Hypo Alpe-Adria-Bank International.
“Vulture funds without a doubt will look at it,” says Arno Lawrenz, chief investment officer at Cape Town-based Atlantic Asset Management. The “vulture funds” are US-based funds that sometimes take control of companies by pur- chasing their debt.
Lawrenz — who doesn’t own Edcon bonds — says there is pressure on Edcon to be seen to be doing something. Of the purchase price, Edcon now needs to start repaying R4.7-billion of debt denominated in euros, dollars and rands next year, with another R20billion due by 2019.
This debt has cast a shadow over how the company operates in its 1 500 stores, which includes fashion chains Edgars and Jet. In a bid to stem the bleeding and end 12 consecutive quarters of losses, Edcon is now slashing jobs.
In September, Edcon was cut to seven levels below investment grade by ratings agency Standard & Poor’s, which cited its “substantial debt” and declining sales on credit.
Then, in January this year, Moody’s downgraded Edcon’s global-scale corporate family rating due to concerns about its ability to manage debt and sustain its capital structure.
Edcon spokeswoman Debbie Millar said this week that the company is “assessing ways to improve the capital structure” — but she gave no detail.
“I’m not aware” of potential buyers for the company, she said.
Last year, the retailer’s net debt jumped 10% to R21.7-billion.
“Edcon would make a good target for a foreign fund,” said Kyle Rollinson, an analyst at Avior Capital Markets.
“It holds some of the best space in South Africa, it has great brands in South Africa, but has missed on strategy because of its debt noose.”
But Edcon’s debt squeeze comes at a tough time, because shops are generally grappling with lower consumer spending; low growth projections and 24.3% unemployment. Retail sales growth slowed to 1.7% in January compared with 2% the previous month — missing economists’ estimates.
Asief Mohamed, chief investment officer of Aeon Investment Management, said: “I won’t be surprised if Edcon restructured in the next couple of months to take out uncertainty in the marketplace.
“Bain would be in a much better position to refinance now than leave it to the last minute.” — Bloomberg
It has great brands . . . but has missed on strategy because of its debt noose