Debt noose tightens around Edcon

EDCON'S debt squeeze appears to be getting tighter after ratings agency Moody's placed it "on review for a downgrade".

EDCON'S debt squeeze appears to be getting tighter after ratings agency Moody's placed it "on review for a downgrade".

In recent weeks, brokerages have raised concern about when Edcon will need to restructure its debt, which is now sitting above R22-billion.

Edcon, which owns the country's biggest clothing and apparel retailer, Edgars, and Jet, CNA, Boardmans and Red Square, was bought in 2007 by private equity company Bain Capital for R25-billion in what was the largest private-equity deal yet in South Africa.

The deal was financed by debt, using Edcon's profits to pay off the loans.

Moody's said Edcon had failed to cut its debt burden meaningfully and the sluggish economic environment is constraining its cash flows.

"Moody's does, however, recognise Edcon's extended debt maturity profile and does not see a near-term payment default event risk over the next 12 to 18 months," it said.

In the June quarter, Edcon's R838-million in net financing costs exceeded its R679-million in earnings before interest, taxes and other deductions.

Brokerage Morgan Stanley advised investors to take a short position on the bonds raised by Bain and listed on the Irish Stock Exchange.

It said Edcon had enough cash to keep going for a year-and-a-half, "but it will need to address the capital structure well in advance of that.

"Edcon is burning cash, and it is a matter of when, not if, this company needs to restructure."

Merrill Lynch said that while Edcon "has a realistic chance of avoiding a default in spite of continuing macroeconomic pressures", this could "probably only be achieved through raising new equity by early 2016".