Edcon outlook revised to negative

Standard & Poor's Ratings Services has revised its outlook to negative from stable on Edcon Holdings.

At the same time, Standard & Poor's (S&P) affirmed all its ratings on Edcon, including its "B+" long-term corporate credit rating, the "B-" issue rating on the €630 million senior unsecured floating-rate notes due 2015, and the "BB-" rating on the €1.18 billion senior secured floating-rate notes due 2014 issued by guaranteed related entity Edcon.

"The outlook revision follows the company's operating underperformance, which resulted in Edcon's adjusted EBITDA interest coverage ratio (including interest accrued on the shareholder loan) of 1.0x in fiscal 2008, well below our guideline of 1.5x," said Standard & Poor's credit analyst Diego Festa.

Lack of geographical diversity

Although the company's financial risk profile is underpinned by the absence of short-term maturities, deteriorating macroeconomic prospects for South Africa will make it harder for the company to improve its debt protection measures to levels more appropriate for the ratings, said S&P.

The ratings reflect the company's highly leveraged profile, as a consequence of the takeover led by US-based private-equity firm Bain Capital LLC in June 2007. They also reflect the lack of geographical diversity of Edcon operations and its reliance on consumer credit to sustain retail sales.

The ratings are further constrained by the “cyclicality and seasonality” of the apparel retail industry and the discretionary nature of clothing and footwear purchases, all of which combine to increase overall earnings volatility.

Company must restore its adjusted EBITDA interest cover to 1.5x

"Nevertheless, the company benefits from its number one position in the growing South African clothing and footwear market and from its still adequate liquidity position. The company has a portfolio of 14 distinct branded chains organised into two divisions, department stores and discount, which aim to cover a large spectrum of the South African consumer base. In fiscal 2008 ended March 29, clothing and footwear sales represented 60% of revenues compared with 62% in 2007," said S&P.

"The negative outlook reflects the pressure on Edcon's business from the increasing weakness of South African discretionary consumer spending in the context of the company's already aggressive financial profile," added Festa.

To maintain current ratings, S&P said Edcon needs to restore its adjusted EBITDA interest cover to 1.5x and maintain it thereafter in line with Standard & Poor's guidelines for the rating level.

"The ratings may be lowered if flat or declining sales and profits prevent Edcon from improving its debt service coverage. For the stable outlook to be restored on the existing ratings we expect to see positive free operating cash flows and evidence of deleveraging in the next 12 to 18 months," concluded S&P.

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