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Edcon may be vulnerable as falling bonds signal distress

Vulture funds without a doubt will look at it – Atlantic Asset Management.

Edcon Holdings, South Africa’s biggest clothing retailer by sales, may become a target for distressed-debt buyers after the price on the unprofitable company’s bonds declined to a record.

Edcon’s 425 million euros ($461 million) of junior bonds due June 2019 had dropped to 22 cents on the euro last week from 38 cents the start of the year, according to data compiled by Bloomberg, indicating investors expect to take losses on their holdings. The bonds are the second-lowest in Bank of America Merrill Lynch’s 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.

“Vulture funds without a doubt will look at it,” Arno Lawrenz, chief investment officer at Cape Town-based Atlantic Asset Management, said by phone, referring to mostly U.S.-based funds that sometimes take control of companies by purchasing their debt. He doesn’t own Edcon bonds. There’s pressure on Edcon to be seen to be doing something, Lawrenz said.

The company, owned by U.S. private equity firm Bain Capital Partners LLC, needs to start repaying about R4.7 billion of debt denominated in euros, dollars and rand next year, with another R20 billion due by 2019, according to data compiled by Bloomberg. Edcon, which has more than 1 500 stores across fashion chains including Edgars and Jet, is also cutting jobs to try and end a run of 12 consecutive quarterly losses.

‘Good target’

Edcon was cut one step to seven levels below investment grade on September 30 by Standard & Poor’s, which cited its “substantial debt” and declining sales on credit. Moody’s downgraded Edcon’s global-scale corporate family rating on Jan. 21 due to concerns about its ability to manage debt and sustain its capital structure.

The company is “assessing ways to improve the capital structure,” spokeswoman Debbie Millar said in an e-mailed response to questions, without giving more detail. “I’m not aware” of potential buyers for the company, she said by phone.

Bain declined to comment when contacted by e-mail.

Johannesburg-based Edcon is struggling under the burden of debt following the R25 billion buyout by Bain eight years ago. The retailer’s net debt jumped 10 percent to R21.7 billion last year, the company said on February 20.

“Edcon would make a good target for a foreign fund,” Kyle Rollinson, analyst at Avior Capital Markets, said by phone from Johannesburg. “It holds some of the best space in South Africa, it has great brands in South Africa, but has missed on strategy because of its debt noose.”

South African shops are facing lower consumer spending after the economy grew at the slowest pace last year since a 2009 recession and unemployment was 24.3% in the three months through December. Retail sales growth slowed to 1.7% in January compared with 2% the previous month, missing economists’ estimates.

“I won’t be surprised if Edcon restructured in the next couple of months to take out uncertainty in the marketplace,” Asief Mohamed, chief investment officer of Aeon Investment Management, which doesn’t own Edcon bonds, said by phone from Cape Town. “Bain would be in a much better position to refinance now than leave it to the last minute.”

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