Last week, Morgan Stanley issued a negative report titled “The Capital Structure is Unsustainable”, and advised investors to take a short position on its Euro-denominated debt.
Investors in the 13.375% bonds, which mature in 2019, were rattled. The bonds plummeted from 63.5 to a bid of less than 47. They are now trading at around 40. The senior secured bonds were less affected, with the €317 million 9.5% 2018 bonds bid at 86.5 compared to 91.2 at the start of the week, Reuters reports.
Last week, Standard & Poors (S&P) downgraded Edcon’s corporate debt from B- to CCC+, arguing its top line and profitability were under pressure from declining credit sales. “We view its capital structure as unsustainable”, S&P said.
This followed another setback: with credit retail sales falling as a result of credit provider Absa’s tighter lending criteria, Edcon had been in talks with African Bank to become its second-look provider. With African Bank now in business rescue, Edcon has to find another bank to step into the gap.
The Morgan Stanley research report intimates Edcon is fast running out of runway and must restructure its capital in the next 12 months. This has shaken European high-yield buyers. However, Edcon is profitable and has sufficient cash flow. S&P acknowledges this, saying short-term liquidity is “well-covered”.
Morgan Stanley’s analysis of Edcon is possibly inaccurate. It based is based on “last 12 month analysis”, which means the figures will not reflect the improvements in the early stages of a turnaround.
According to Edcon’s latest report for the first three months to June, retail sales are up; cash flow is improving as capital expenditure falls. Capex will drop from R1.3 billion invested in the 2014 financial year to R750 million in 2016; working capital has improved; and cutbacks will yield savings.
The company reported retail sales up 5.7% and cash sales up 15.1%, but adjusted EBITDA fell by 6.6% to R679 million off revenue of R6.6 billion.