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Rating Action:

Moody's assigns a B2 rating to Edcon's proposed EUR500 million senior secured notes; outlook changed to stable

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.

Rating Assignments:

- EUR500 million senior secured notes due 2018 - B2 (LGD4, 53%) - issued by Edcon (Pty) Ltd.

Rating Actions:

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, 57%)

Outlook for all ratings changed from negative to stable.

RATINGS RATIONALE

"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 Mukherjee.

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 billion.

REGULATORY DISCLOSURES

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.

Johannesburg
Soummo Mukherjee
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

London
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.
The Forum
2 Maude Street
2196 Sandton
Johannesburg
South Africa
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns a B2 rating to Edcon's proposed EUR500 million senior secured notes; outlook changed to stable
No Related Data.
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