As a result of this, it has placed on review for downgrade the B3 global scale corporate family rating (CFR) of Edcon Holdings Limited (Edcon) and Edcon’s B3-PD probability of default rating.
It has also placed on review the B3 rating on the senior secured notes issued by Edcon Limited as well as the Caa2 rating on the senior notes issued by Edcon Holdings Limited.
(READ MORE: Edcon announces leadership changes)
“The review for downgrade reflects Moody’s concern over Edcon’s ability to proactively manage its debt profile and sustain its current capital structure amid the weakening operating environment in South Africa,” the agency said.
“This reflects the company’s failure to reduce leverage over the past few years towards our expectations of 6.0x, with adjusted debt to EBITDA rising to 8.3x for the last twelve months ended 29 June 2014 compared to 7.2x as of the financial year end 29 March 2013.”
Moody’s also indicated that the uncertainty about the company’s financial policy and near term objectives will constrain growth in the company’s cash flows and the pace of its deleveraging going forward.
“Moody’s does, however, recognise Edcon’s extended debt maturity profile and does not see a near term payment default event risk over the next 12 to 18 months,” it added.
It further stated that Edcon is exposed to foreign currency risks where a weaker domestic currency increases the costs of both local and imported merchandise adding pressure on operating margins and increases the rand value of foreign denominated debt.
“The on-going review of the ratings will focus on assessing the options available to Edcon, understanding the management strategy and the likelihood of delivery against its operating and financial targets and forecasting the company’s credit profile and deleveraging trajectory over the next 18 months,” Moody’s said.
“We expect to finalise the review in the near term, following the forthcoming release of Edcon’s second quarter trading results in November 2014.”