A day after state-owned regional airline SA Express announced it had been placed in provisional liquidation, the country’s largest non-food retailer, Edcon, announced it had applied for voluntary business rescue. Landlords, lenders and the PIC are the biggest losers.
This will have a material impact on the firm’s 14,000 permanent employees, 25,000 temporary staff, 750 suppliers and landlords like Redefine Properties which had already provided Edcon with rent reductions.
It is estimated that Edcon’s floor space accounts for one-tenth of the occupancy in South Africa’s shopping malls.
It was arguably just a matter of time for this to occur after CEO Grant Pattison told suppliers in late March that the company had sufficient liquidity to pay salaries, but could not honour any other accounts payable during the lockdown period. Suppliers have not been paid for both the March and April month-ends and paying April salaries will require assistance from the UIF Covid-19 TERS program.
In this circumstance, South African law requires that the company either be placed in liquidation or business rescue.
“To provide us with a longer period to raise the money we require to pay creditors, the board has taken a decision to file for business rescue,” says Pattison.
Edcon had been on life support since May 2019 when lenders, landlords and the PIC provided the company with a R2.7-billion loan to finance its restructuring plan.
Of this amount, R1.2-billion was invested by the PIC on behalf of the Unemployment Insurance Fund, according to Bloomberg.
“The loan, of which about R230-million had yet to be drawn down, was substantially utilised for funding the losses for the financial years ending March 2019, and March 2020, as planned,” Pattison adds.
This was in accordance with the turnaround plan, which was on track at the end of December 2019 – despite South Africa falling into recession in the second half of last year.
But add the recession, load shedding and Covid-19 and the load became impossible to bear. Following President Cyril Ramaphosa’s first announcement on Sunday 15 March and the subsequent imposition of the lockdown, Edcon lost R2-billion in sales. In addition, its retail brands could not collect on their debtors because customers usually pay their credit instalments in-store.
Retailers like TFG and Truworths will be feeling similar discomfort over their debtors’ books.
“You cannot factor those losses into a business plan,” Pattison says.
While the company has applied for voluntary business rescue, this has not yet been acknowledged by the Companies and Intellectual Property Commission, which will reopen fully only on Friday 1 May.
However, business rescue practitioners Piers Marsden and Lance Schapiro have been appointed by the board.
Edcon will open for trade under Level 4 restrictions on Friday – it can sell most things with the exception of shoes – but will do so under business rescue conditions.
Now it will be a case of trying to raise additional funding – a nigh-impossible task, or trying to dispose of assets – also a difficult task.
Pattison is trying to look on the bright side.
“In the ordinary course of events, it would be reasonably easy to sell a ‘good’ business,” he says.
Within Edgars and Jet, each of which turns over upwards of R7-billion, there is a core of very good and profitable stores. “These are hard businesses to build from scratch,” he says.
But, he adds, “the post-Covid world is an unknown”.
Reuben Beelders, chief investment officer at Gryphon Asset Management is less optimistic.
“We have too many retailers and too much retail space in South Africa. This will be an unpopular sentiment, but Edcon should have been allowed to fail at the time of its last bailout.”
The deteriorating health of the global economy is an increasing cause for concern, he adds.
This is a sentiment echoed by Investec chief economist Annabel Bishop, who notes that Covid-19’s impact is continuing to see global growth forecasts revised lower.
A number of forecasts see a downturn of five quarters or more, with perceived risks to the outlook high, she said in a note to clients.
“Forecasts tend to worsen even further on such elevated risk perceptions.”
While Level 4 will see the opening of some businesses and an extension on retail trade, this may not be enough to get debt-laden businesses out of trouble.
“We won’t see people going through malls in significant numbers,” says Maahir Jakoet, portfolio manager of Old Mutual Customised Solutions. For some retailers, it may not even be worth opening. Take the Spur Group for instance, which will be allowed to deliver food but not serve eat-in customers, and the cost of opening up may not be worth the returns.
“They may simply take the rent reduction and apply for funding,” Jakoet says. “We are likely to see many more companies in Edcon’s position in the future.”
For investors worried about this, it may be worth taking a closer look at Shari’ah compliant funds which, among other restrictions, do not invest in companies that have a debt load of more than 30% of asset value or market capitalisation.
Being light on debt is a definite advantage in these uncertain times. BM