Share

Outright bankruptcy of Edcon is remote - hedge fund

Johannesburg - Edcon Holdings was a profitable South African retailer with few debt obligations before Bain Capital Partners took control in its first foray on the continent. The 86-year-old retailer is now a loss-making giant that Standard & Poor’s says may default on bond payments.

For the Boston-based private equity firm founded by one-time Republican presidential nominee Mitt Romney, the R25bn leveraged buyout in 2007 hasn’t quite gone to plan.

The acquisition required Edcon to sell €1.83bn of high-yield bonds just before the global financial crisis.

Since then, the rand lost more than 40% against the euro and South Africa has endured a recession. Edcon, which began losing money in 2008, faces more than R40bn of repayments in the next five years.

“Edcon took on too much debt,” Jean Pierre Verster, who helps oversee a R4.8bn hedge fund at 36ONE Asset Management, said by phone on July 10. “It was Bain’s first deal here so it probably didn’t fully understand South Africa and, in 2007, it didn’t know the global financial crisis was around the corner.”

Bain and Edcon declined to comment.

When Bain, which has completed more than 280 investments globally since its founding in 1984, made its move, the South African economy was growing at more than 5%. Credit extension was widening, supporting retailers like Edcon that let shoppers buy clothes, shoes and fragrances with store cards.

Bain owed

Edcon owes money to bondholders and Bain itself. By the end of March, Edcon owed Bain R9.15bn in loans and interest, according to the retailer’s annual report. Edcon has also paid a Bain affiliate R626m in fees since 2008.

“It’s common for private equity sponsors to leverage the balance sheet,” Raam Ratnam, a London-based S&P analyst, said by phone July 13. “In Edcon’s case, there was a substantial foreign-exchange risk with the mismatch between Edcon’s cash flows and its notes.”

South Africa’s retail sector has a lot of potential and Edcon has some good brands, Ratnam said. But Edcon has suffered as consumers were battered by a faltering economy, strikes, high inflation, curbs on credit and indebtedness. Bain hired Goldman Sachs Group and Houlihan Lokey to advise on a restructuring.

Edcon has almost 40 000 staff across 1 500 stores in nine southern African countries. It accounts for about 6% of South Africa’s retail space. Africa’s biggest banks, including Standard Bank Group [JSE:SBK], Barclays Africa [JSE:BGA] and a unit of FirstRand [JSE:FSR], have loans and investments at risk. The biggest bondholders include Franklin Resources, ING Groep and Ashmore Investment Management.

‘Strategic blunder’

Edcon isn’t Bain’s only pre-global financial crisis purchase that’s not making money. Toys “R” Us, bought in 2005, is reporting losses and vacating its flagship store in New York’s Times Square. IHeartMedia, which Bain acquired with Thomas H. Lee Partners in 2008, last year extended its bonds’ maturities to avoid bankruptcy amid continued losses.

As Edcon’s losses grew and interest payments swelled, it sought options to raise capital. Three years ago, it sold its store-card portfolio for R10bn to Barclays Africa Group. The bank, though, tightened lending criteria, curbing growth for Edcon which relies on credit sales.

“The 2012 decision to sell the book was a clear strategic blunder,” Verster said, referring to the cards business. “The sale destroyed a lot of value and left Edcon unable to use the credit lever to stimulate sales.”

Even so, the risk of outright bankruptcy is remote, he said.

Bain, which once intended to hold an initial public offering for Edcon, enabling the firm to exit, may face the cost of more debt restructuring for bonds due in 2016 and 2018. To raise money, the retailer has also said it may sell non-core assets that could include mobile phone and insurance operations.

“Too much debt always hangs over a business’s head like a sword of Damocles,” said Kokkie Kooyman, head of Cape Town- based Sanlam Global Investments, which oversees about $1bn. “It just reduces the margin for error – something goes wrong and you’re in trouble.”

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
19.02
-0.6%
Rand - Pound
24.01
-0.5%
Rand - Euro
20.53
-0.3%
Rand - Aus dollar
12.35
-0.0%
Rand - Yen
0.13
-0.6%
Platinum
900.40
+0.4%
Palladium
998.40
-0.3%
Gold
2,210.05
+0.7%
Silver
24.65
+0.0%
Brent Crude
86.09
-0.2%
Top 40
68,079
+0.6%
All Share
74,269
+0.5%
Resource 10
56,875
+2.2%
Industrial 25
103,593
+0.3%
Financial 15
16,463
-0.4%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders