Edcon bonds tank after damning trader note
Thu Sep 25, 2014 6:27pm IST
* Short position note sends bonds tumbling
* Bond investors expect distressed exchange
* Retailer's credit business continues to weigh
By Robert Smith
LONDON, Sept 25 (IFR) - Edcon's bonds took another massive hit on Thursday, after Morgan Stanley's credit trading analysts published a note supporting a short position on the struggling South African retailer's debt.
Edcon's holding company's bonds are now bid at less than half of their face value, despite being issued at par less than a year ago, with European high-yield investors fearing another major wipe-out following Phones 4U's implosion earlier this month.
Alan Yesner, a credit trading analyst at Morgan Stanley, published the trade idea on Wednesday afternoon. The damning report is titled "The Capital Structure is Unsustainable," and includes stark warnings in bold text such as "cash interest expense is greater than Ebitda."
"I like to short the 13.375% holdco notes at 65 with my expectation of no recovery, and short the senior secured notes at 90 which I think need to be written off by 50% to get to a right-sized capital structure," said Yesner in the note.
He expects the company to get to grips with its capital structure in the next 18-months.
The 13.375% bonds began the week bid at a cash price of 68 and were trading around 63.5 before the note was published, according to Tradeweb. The bonds have now plummeted to a bid of less than 47, meaning they have lost 20 points over the week.
The senior secured bonds have been less rattled, with the EUR317m 9.5% 2018 bonds bid at 86.5 compared to 91.2 at the start of the week.
"The report was pretty brutal and there are few marginal buyers for this kind of risk right now, so even relatively small selling can push a name down," said a London based high-yield bond investor.
European high-yield buyers have been particularly skittish about potential distressed credits after UK retailer Phones 4U rapidly fell into administration earlier this month. This wiped out its £205m PIK note, while its £430m senior secured bond is now bid at just 37 having begun the month at par.
Investors will be desperate to avoid a similar fate for Edcon.
"If it becomes more obvious to the shareholders that Edcon can't grow into its capital structure, shareholders and the bondholders will want to do everything they can to avoid administration," the investor added.
"At that point I think what probably happens is a distressed exchange with a promise to contribute equity. Bondholders will be backed into the corner of taking a haircut to save the company from that outcome."
BRIDGE TO NOWHERE
Edcon's holdco bondholders have already had a torrid year.
Edcon printed the punchy EUR425m 5.5-year non-call 1.5 senior notes in November 2013 at par to yield a whopping 13.375%, giving it the dubious honour of the highest cash-coupon of any bond issued in Europe's high-yield market that year.
Edcon's private equity owner Bain Capital was willing to pay these sky-high yields as the new debt was structured as a bridge to an IPO, with a short non-call period and a 100% equity claw.
"The instrument is not designed to survive an IPO, it's designed to plug a maturity hole and as an expensive insurance policy if the IPO does not happen," said a banker on the deal when it was issued.
The bonds traded as high as 107 in January, as confidence in a listing built. But the value of the notes soon crashed as investors began to fear that the bridge to an IPO might become a bridge to nowhere.
Ruptures in the company's credit business particularly undermined the IPO story. Edcon outsourced its credit card business to Absa at the start of the year, which promptly imposed more stringent requirements and turned away scores of credit customers.
The retailer was in advanced discussions with African Bank (Abil) to step in as a second credit provider, but in August the South African bank announced a multi-billion dollar loss, prompting the South African Reserve Bank to step in with a rescue package.
The Morgan Stanley note discusses the possibility of Edcon finding a new secondary credit provider as a potential counter-argument to their "bearishness," but is ultimately sceptical on this front.
"I have a negative outlook for the South African economy over the medium term, the typical consumer is stretched, and I believe credit conditions are not going to ease soon," said Yesner in the note. (Reporting by Robert Smith)
FILED UNDER:
dove i secured sono trattati coi guanti bianchi e gli altri a pesci in faccia