Sale of Edcon's receivables book credit positive

On Wednesday‚ Edcon announced it had reached an agreement with Absa‚ subject to certain conditions‚ that it would dispose 100% of its private store credit card portfolio for a cash consideration equal to the net book value at the effective date of the acquisition. The net book value at 31 March 2012 was R10 billion.

The bulk of the proceeds is expected to reduce the current debt outstanding through the redemption of the notes issued under its securitization programme‚ OntheCards (R4.3bn) and repaying a portion of its senior secured debt.

In addition‚ through a long-term strategic relationship‚ Absa will provide retail credit to Edcon customers while Edcon will continue to be responsible for all customer facing activities.

Moody's sees the proposed sale as credit positive primarily due to the expected reduction of its current high debt outstanding (R27bn as of 31 March 2012) to a more manageable level. Assuming the bulk of the proceeds will be used to reduce debt‚ the leverage as measured by total adjusted debt/EBITDA (as defined by Moody's) is expected to fall from 8.1x towards 6x.

Moody's‚ however‚ still sees leverage above 6x as a constraint to the current ratings and would only see upward rating pressure once leverage is reduced below 5.5x. Furthermore‚ the refinancing strategy on the approaching 2014 debt (about R11.7bn) would need to be formally addressed to enable any potential upward pressure on Edcon's current rating or outlook.

Moody's believes Edcon's credit profile will benefit from the:
i) elimination of underwriting risk;
ii) removal of the funding requirement for its receivables book; and
iii) continued face to face interaction and interface with its customer base.

On the other hand‚ Moody's says it views the removal of underwriting control of the receivable book to potentially constrain future revenue growth (51% of total group revenues is based on credit sales) should the strategies of each party diverge.

The sale is expected to conclude by second half of 2012 and is still subject to regulatory approvals and release of security over its private label store card portfolio under existing notes and funding structures.

Moody's will monitor the developments going forward.

Edcon is the largest non-food retailer in South Africa. Edcon primarily operates in South Africa from where it derives 94% of its retail sales with the remaining operations located in neighbouring African countries.

The company has three main retail divisions: Department stores (Edgars‚ Red Square‚ Edgars Active and Boardmans)‚ Discount (Jet‚ Jet Mart and Legit) and CNA‚ which offers stationery‚ books‚ magazines‚ toys‚ music and movies. For the year end 31 March 2012‚ Edcon recorded revenues of R27.9 billion and Moody's adjusted EBITDA of R4.8 billion.