Bain-Owned Edcon Faces Day of Reckoning With Bond Payment

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Edcon Holdings Ltd., the loss-making South African retailer, has to choose between spending the little money it has or not paying a 28 million euros ($31 million) coupon due on Tuesday as it seeks to restructure borrowings.

The company, with its bonds priced the second-lowest in Bank of America Merrill Lynch’s 595-member Euro High Yield Index, has the option to delay payment by a maximum of 30 days before a default under the terms of the bond. The coupon is equivalent to more than half Edcon’s working capital in fiscal 2015, with the company having warned in May that it might not be able to raise new funding or sell assets.

Edcon, South Africa’s biggest clothing retailer with chains including Edgars and Jet, has about 25 billion rand ($2 billion) of debt and has cut jobs as a slowdown in South African consumer spending contributes to losses and slower sales growth across its more than 1,500 stores. Chief Executive Officer Jurgen Schreiber is stepping down as Edcon needs to start repaying about 4.5 billion rand of debt denominated in euros, dollars and rand next year. Bain Capital Partners LLC, which bought Edcon in 2007, has hired Goldman Sachs Group Inc. and Houlihan Lokey Inc. to advise on a restructuring.

Payment of Tuesday’s coupon at a later date “usually just delays the pain and allows for a bit more time to negotiate with bondholders,” Jean Pierre Verster, analyst at 36one Asset Management Ltd., said Monday. A deferred payment could affect the bond’s ratings and yield “seeing that it is a clear sign that the company is in a difficult financial position.”

Spreading Jitters

No other South African company has delayed a coupon payment in the past five years, apart from African Bank Investments Ltd. which suspended all securities after collapsing last year.

Bain and Edcon declined to comment when contacted on Monday.

“Even if bondholders are clear as to why the coupon is being delayed, it will cause jitters for others such as landlords and employees,” Asief Mohamed, chief investment officer of Aeon Investment Management, which oversees about 2.3 billion rand of assets, said by phone from Cape Town.

Edcon’s 425 million euros of bonds due June 2019 were quoted at 22.5 cents on the euro on Monday, a 6.2 percent drop from Friday’s price and a 40 percent decline from the start of the year, according to data complied by Bloomberg. The bonds are the second-lowest in the Euro High Yield Index, behind only the subordinated securities of Heta Asset Resolution AG, the “bad bank” of failed Hypo Alpe-Adria-Bank International AG.

Edcon’s retail-sales growth slowed to 2 percent in the 52 weeks ended March 28 from 5.1 percent a year earlier, the company said in May. Credit sales fell and the decline continues to delay “meaningful growth,” Edcon said.

If Edcon doesn’t make the payment “it will highlight the tight cashflow they have and will create further negative sentiment,” Mohamed said.

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