Bain’s Edcon Asks Investors to Take Loss in Debt Restructure

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Edcon Holdings Ltd., South Africa’s biggest clothing retailer, asked holders of the company’s 425 million euros ($475 million) of 2019 bonds to take a loss as the company seeks to shore up finances.

Debtholders can opt to exchange each 1,000 euros of notes for 400 euros of new super-senior payment-in-kind notes including a 50 euro payment, the Johannesburg-based company said in a statement on Tuesday. A second option is to exchange 1,000 euros of notes for 150 euros of super-senior PIK notes with the one-time 50 euro payment and 150 euros of new senior secured PIK securities as well as warrants for as much as 30 percent in equity.

The new notes will give Edcon the ability to pay interest with cash or debt, which means the loss-making retailer has an alternative to repaying in cash.

“The haircut on the subordinated bonds was highly anticipated -- painful, but better than expected,” Antoine Barbara, a managing partner at trading firm Trench Capital Partners in London, said by phone. “This haircut represents only 3.7 percent of gross debt including rental expenses, but reduces interest payments significantly. We can only wonder if such a measure is enough to put Edcon back on track.”

Payment Choice

Edcon, owner of fashion chains including Edgars and Jet, was bought by U.S. private equity firm Bain Capital Partners LLC for 25 billion rand ($2 billion) in 2007 in a deal that burdened the retailer with debt. Bain hired Goldman Sachs Group Inc. and Houlihan Lokey Inc. in May to advise on restructuring the borrowings. Edcon had to choose between spending limited cash resources to repay a 28 million-euros coupon on the 2019 bonds, which was due on Tuesday, or restructuring its debt.

Edcon’s 425 million euros of bonds due June 2019 were quoted at 37 cents on the euro at 3:40 p.m. in Johannesburg on Tuesday, a 52 percent gain on Monday’s price, according to data complied by Bloomberg. That pared the year’s decline to 4.7 percent.

If more than 90 percent of debt holders agree to the deal the principal amount of the notes will drop by almost 73 percent and the interest on the notes will fall to 5 percent a year from more than 13 percent, Edcon said. The early consent payment of 50 euros applies to investors who agree to the deal before July 14 while the entire offer will expire on July 28, the retailer said.

Further Uncertainty

“This is where a lot of the uncertainty lay, but is not necessarily sustainable,” Kyle Rollinson, an analyst at Avior Capital Markets in Johannesburg said by phone. “There will still be further uncertainty for the next 12 to 24 months as to what will ultimately happen.”

Edcon’s debt includes 300 million euros of March 2018 notes, $250 million of March 2018 bonds and a 1.01 billion rand floating rate note due April 2016, according to data compiled by Bloomberg. Under borrowing terms agreed to before the restructuring, Edcon would have needed to start repaying about 4.7 billion rand of debt denominated in euros, dollars and rand next year, with another 20 billion rand due by 2019.

“Noteholders are asked to support the group’s restructuring on a broader basis,” Edcon said. The “undertaking will extend to other debt instruments.”

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