Edcon strains under mountain of debt

The mountain of debt looming over Edcon, which owns South Africa's largest clothing retailer, is looking increasingly menacing.

Edcon was bought by private equity group Bain Capital for R25-billion in 2007 - the largest private equity deal in South Africa at that stage.

But Bain financed the purchase with large amounts of debt, mostly on overseas bond markets, which left the retailer battling to pay back this money.

This week, yields on Edcon's June 2019 euro-denominated bond jumped to a record 69.9%, signalling that bondholders are far from comfortable with the retailer's debt levels. Edcon's à425-million bond, issued in November 2013, is the worst-performing high-yield corporate bond this year.

"Operationally, Edcon is still profitable," said Bronwyn Blood, a money manager at Cadiz Asset Management. "However, this is not sustainable as large debt levels will need refinancing at interest rates that Edcon cannot afford."

The problem is that potential shoppers are also under pressure due to high inflation and unemployment. Approvals for shoppers wanting to buy on credit at Edcon's stores have fallen by about 50% since Absa took over the retailer's lending facility in 2012, and efforts to find a second provider of credit have been unsuccessful.

In the six months to September, Edcon lost R1.1-billion, and it will have to make debt payments of almost R2-billion this year. "There's too much debt and Edcon is going to be under pressure," said Conrad Wood, head of fixed income at Momentum Asset Management, which owns Edcon bonds.

"This year's interest payments are a strain on the balance sheet. The consensus in the market is that the balance sheet isn't sustainable."

One potential option would be for Edcon to relist on the JSE to raise the cash to settle its debt - but this seems unlikely now.

"There is not enough value in Edcon for a listing," said Jean Pierre Verster of 36ONE Asset Management.

Edcon's chains include Edgars, Red Square, CNA and Jet. So one of these assets may be on the block.

Blood said Edcon "would need to look at some form of balance sheet restructuring ".