Taking a deep bath

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,