Bain-Owned Edcon’s Ratings Cut After Missed Coupon, Losses

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Edcon debt chart

Edcon Holdings Ltd. had its credit rating cut by Standard & Poor’s and Moody’s Investors Service after South Africa’s biggest clothing retailer missed a coupon payment this week and asked investors to take losses on debt.

The assessment was lowered to CC, S&P’s fourth-lowest speculative grade that it defines as expecting “default to be a virtual certainty,” from CCC+, the ratings company said on Thursday in an e-mailed statement. Moody’s cut the level on senior notes to Ca from Caa3 in a separate statement. The outlook is negative, indicating more reductions may happen, S&P and Moody’s both said.

Edcon on Tuesday asked investors holding 425 million euros ($472 million) of bonds due in 2019 to swap the debt and accept losses to help it shore up its finances.

“The downgrade of the senior notes is capturing the higher expected loss that will be incurred as a result of the proposed exchange,” Moody’s said. The offer “will constitute a default under an instrument within the company’s broader capital structure,” it said. The exchange “also creates uncertainty around the broader implications on Edcon and its overall credit profile.”

Bain Capital Partners LLC bought Edcon in a private-equity deal in 2007 for 25 billion rand ($2 billion), using debt to fund the purchase. Bain has been unable to exit its investment, with Edcon having slipped into losses.

Debt Obligations

Edcon, with 1,500 stores and more than 45,000 permanent and temporary staff, faces at least another 5 billion rand in debt obligations within a year and more than 26 billion rand in the next three years, according to the company’s annual report released this week.

“The rating downgrade and language is standard process required by the agencies because the exchange offer is compensating bond holders below the original principal amount and not because we are unable to fulfill any financial obligations,” Debbie Millar, a spokeswoman for Edcon, said by e-mail. “Bondholders are not forced to do anything, although the offer is at a significant premium to where the bonds were trading before it launched.”

Edcon may have to consider restructuring more debt as payments come due. It has three bonds maturing in March 2018, one of 300 million euros, a second with 317 million euros outstanding and a third for $250 million. It also has a 1.01 billion-rand 2016 floating-rate note with a 31 million rand payment due Monday, according to data compiled by Bloomberg.

Edcon is “going to have to do major restructuring fast,” Syd Vianello, an independent retail analyst based in Johannesburg, said by phone. “Restructuring the bonds strengthens the balance sheet, but it doesn’t provide cash flow. The move on the bonds earlier this week doesn’t solve the problem, it’s just a stop-gap.”

The price on Edcon’s June 2019 bonds was quoted at 34.8 cents on the euro at 2:12 p.m. in Johannesburg on Friday, a 0.8 percent drop from Thursday. When these notes were first announced in November 2013, they were quoted at 103 cents. The bonds are priced the third-lowest in Bank of America Merrill Lynch’s 596-member Euro High Yield Index.

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