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Global Credit Research - 22 Feb 2011
Approximately EUR2.1 billion of rated debt affected
Johannesburg, February 22, 2011 -- Moody's Investors Service today affirmed Edcon Holdings (Proprietary)
Limited's ("Edcon" or "the company") B2
corporate family rating ("CFR") and probability of default
("PDR") ratings; and, assigned a B2 to the proposed
EUR500 million issuance of senior secured notes due 2018 to be issued
by Edcon's main operating subsidiary, Edcon (Pty) Ltd.
But guaranteed by Edcon, Edcon Acquisition (Pty) Ltd and Edgars
Consolidated Stores Limited. Concurrently, Moody's
changed Edcon's rating outook to stable from negative.
- EUR500 million senior secured notes due 2018 - B2 (LGD4,
53%) - issued by Edcon (Pty) Ltd.
Edcon Holdings (Proprietary) Ltd:
- EUR 378 million senior unsecured notes due 2015 - affirmed
at Caa1; (LGD6, 93%) changed from (LGD5, 89%)
- Corporate Family Rating: B2
- Probability of Default: B2
Edcon (Pty) Ltd:
- EUR1,180 million senior secured notes due 2014 -
affirmed at B2; (LGD4, 53%) changed from (LGD4,
Outlook for all ratings changed from negative to stable.
"The change in outlook is based on the expectation that the proposed
transactions will be completed as proposed resulting in Edcon's
debt maturity and overall liquidity profile improving as a result of addressing
its near-term maturities, including the substantial current
mark to market liability due to its foreign exchange hedges,"
stated Moody's Vice-President Senior Analyst, Soummo
Mukherjee. "Furthermore, the change in outlook also
recognizes Edcon's improved operating performance over the past
year with like-for-like sales growth and market share recovery
in some key categories, reduced bad debt accounts and improved leverage,
although still considered high for the rating category," added
The proposed senior secured notes will be issued by Edcon and guaranteed
on a senior secured basis by virtually all of the group's revenues,
assets and EBITDA. The proposed notes have provisions to be redeemed
in part or in full at any time prior to 2014 at 100% of their principal
amounts plus a make-whole premium and accrued and unpaid interest
or up to 35% with proceeds from certain equity offerings.
After 2014, the notes may also be redeemed based on redemption prices
specied in the bond documents.
Simultaneously, Edcon (Pty) Ltd. is also issuing a super
senior 3-year ZAR issuance in the range of ZAR 1.0-1.5
billion that will rank pari passu with the company's revolving credit
facility and have the same guarantee structure as the 2018 senior secured
notes and be secured by virtually all of the material assets of the group.
Edcon is also in the process of extending the maturity of its current
revolving credit facilities from 2012 to 2014, which will also help
extend its debt maturity profile further.
The use of proceeds of both the super senior ZAR loan and the 2018 senior
secured notes will be to first settle the company's significant
mark to market liability (approximately ZAR5 billion), and for general
corporate purposes, depending on the final size of both issuances.
The B2 rating (LGD 4, 53%) assigned to the EUR500 million
senior secured notes is at the same level as the B2 CFR. The rating
of the notes reflects its junior ranking to Edcon's ZAR 3.117
billion super senior revolving credit facility and intended ZAR 1.0-1.5
billion super senior 3 year ZAR loan, but pari passu with the company's
existing EUR 1.18 billion senior secured notes due in June 2014
but senior to all other subordinated indebtedness, including Edcon's
existing EUR 378 million 2015 senior notes and approximate ZAR 8 billion
of shareholder loans.
The B2 rating for the proposed notes are based on the assumption that
the planned financing is competed as presented to Moody's.
Additionally, the rating assumes that there will be no material
variation to the draft legal documentation reviewed by Moody's and
that these agreements are legally valid, binding and enforceable.
Edcon's B2 rating continues to balance the company's strong
brands and leading market positions in the South African retail industry,
the growth prospects associated with the growing South African middle-class,
together with the company's high leverage for the rating category,
exposure to foreign exchange; as well as, higher electricity
costs over the next few years.
The stable outlook assumes that Edcon will be able to successfully defend
its market position in the South African market and continue to report
stable operating margins. The current outlook further assumes that
the company will focus its positive cash flow generation on reducing its
still high leverage for its rating category.
Edcon's rating could come under upward pressure based on continued
improvement in operating performance and credit metrics, such that
Total Debt to EBITDA is below 5.5 times and Retained Cash Flow
trends towards lower double-digit levels.
Conversely, negative pressure on the current ratings or outlook
is likely to arise if Edcon experiences significant losses in market share
in some of its core segments, a sustainable decline in operating
margin or liquidity problems. Quantitatively, negative pressure
could arise if the company's Total Debt to EBITDA is sustained above
6.5 times; if EBIT to Interest cover deteriorates and becomes
constrained; or, if the company fails to maintain positive
free cash flow generation on a continuous basis. Furthermore,
negative pressure would also arise if Edcon made any interest payments
or redemptions on its shareholder loans prior to the maturity of any other
senior debt in the capital structure, which would lead us to reclassify
the company's large amount of shareholder loans as a hybrid with
some debt component -- thus causing leverage to be materially higher
than current levels.
The principal methodologies used in this rating were Global Retail Industry
published in December 2006, and Loss Given Default for Speculative-Grade
Non-Financial Companies in the U.S., Canada
and EMEA published in June 2009.
Edcon is the largest non-food retailer in South Africa.
Edcon primarily operates in South Africa where it achieves 94%
of its retail sales, the remaining operations being located in neighbouring
African countries. The company has 3 main retail divisions:
Department stores (mainly Edgars and Boardmans), Discount (mainly
Jet and Discom) and CNA, which offers stationery, books,
magazines, toys, music and movies.. For the
last twelve months ended ended 1 January 2011, Edcon recorded revenues
of ZAR25.5 billion and Moody's adjusted EBITDA of ZAR4.5
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service South Africa (Pty) Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
David G. Staples
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service South Africa (Pty) Ltd.
Moody's assigns a B2 rating to Edcon's proposed EUR500 million senior secured notes; outlook changed to stable
2 Maude Street
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
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