Tak­ing a deep bath

Financial Mail - - COVER STORY -

Pri­vate eq­uity gi­ant Bain will be breath­ing a lot eas­ier this week, now that more than half its bond­hold­ers have agreed to take a “vol­un­tary hair­cut” on what they’re owed by Ed­con.

It’s a far cry from the vi­sion es­poused by Bain’s for­mer chair­man, Sel­wyn McFar­lane, who pro­claimed in 2007 that the Bos­ton­based in­vest­ment com­pany had the “ex­pe­ri­ence to pro­pel Ed­con to new heights”.

Far from scal­ing new heights, SA’s largest ap­parel re­tailer is locked in a bat­tle for sur­vival in which the odds are stacked against it. Stan­dard & Poor’s down­graded Ed­con this month to CC, a rock-bot­tom junk sta­tus which the agency de­fines as ex­pect­ing “de­fault to be a vir­tual cer­tainty”.

The new deal it pro­posed to cred­i­tors, giv­ing them about 40% of the face value of the bonds, has drawn much crit­i­cism, but at least it means the com­pany will sur­vive.

S&P pulled no punches in its ver­dict. “Given our view of Ed­con's un­sus­tain­able cap­i­tal struc­ture and the likely com­pen­sa­tion to note­hold­ers be­low the orig­i­nal prin­ci­pal amount, we con­sider such an ex­change of­fer as co­er­cive and dis­tressed, which would be tan­ta­mount to a se­lec­tive de­fault.”

It’s a com­pli­cated swap but Bain had lit­tle choice, given the large amounts of debt foisted on Ed­con as part of the R25bn pri­vate eq­uity buy­out in 2007.

Ex­perts who spoke to the Fi­nan­cial Mail this week said Bain’s model was a pre­car­i­ous one from the start.

“From the out­set they [Bain] drenched Ed­con in debt,” says Lind­say Robert­son, a di­rec­tor of SA pri­vate eq­uity firm Cap­i­tal­works. “It is an Amer­i­can pri­vate eq­uity model I dis­like in­tensely. We never use more than 50% [of eq­uity] gear­ing.”

The rot set in in June 2007 when Bain loaded an ini­tial €1,83bn (then about R17,5bn) in debt, rock­et­ing Ed­con’s gear­ing to over four times the value of its R4bn share­hold­ers’ funds at that stage.

The real fail­ure came in the sec­ond part of its plan: to grow the busi­ness and its prof­itabil­ity. While its ini­tial lack of in­vest­ment in stores hurt Ed­con, other bun­gles,

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