SA’s property giants are breathing a huge sigh of relief over the bailout of SA’s largest clothing retailer, Edcon.
Two weeks ago, Edcon’s creditors agreed to swap R20bn of debt they were owed into equity.
Marc Wainer, chairman of JSE-listed Redefine Properties, told the Financial Mail he immediately fired off an e-mail to Edcon CEO Bernie Brookes to congratulate him.
"It’s a relief. According to [Brookes], over the past six to eight months they came so, so close to business rescue a number of times. They really had their problems. Besides trying to restructure their debt, some creditors stopped supplying them and others applied very strict credit limits. Every week they would have to allocate their available cash in the bank with creditors due and decide who would be paid," Wainer says.
Landlords were just as uncomfortable, as Edcon was given extra leeway to pay rent — being allowed to pay on the 15th rather than the first of every month — and, even then, it was paying late.
Edcon’s stores — from big-box Edgars and Jet to speciality stores such as Boardmans, Legit, and Red Square — contributed about 3.5% of Redefine’s rental from its retail portfolio.
"They will have to get their business model and systems right. [Brookes] talks of having a Rolls-Royce computer system that operates like a Volkswagen. We are sure that they will be focusing much more on house brands where they can make better margins," says Wainer.
Had Edcon tumbled into business rescue, many leases would have been cancelled. While landlords would have been able to rent out the smaller stores, the large Edgars stores, with footprints of between 7,000m² and 12,000m², "would have been a problem", he says.
Another JSE-listed property giant that would have been badly hurt by an Edcon failure is Growthpoint, which rents out 130,000m² of its 1.4mm² of retail space to Edcon — about 9% of the retail total. Overall, Edcon takes 2.4% of Growthpoint’s entire space, including office and industrial property.
Growthpoint CEO Norbert Sasse says his company was "pretty concerned" at one stage, and for the past three years had flagged Edcon’s predicament on its risk committee agenda.
"Clearly [the bailout] puts Edcon on a more solid footing. We understand that the guys are going to come aggressively relooking and may be expanding and closing stores, but the mere fact that they have access to cash flow and [can] refurbish appropriately — all things considered, that removes that uncertainty."
Sasse says Growthpoint always believed there would potentially be a lot of reconfiguration of its space.
"The reality is the Edcon stores in our stores are generally very well located, so we’d be able to relet. Boardmans could be relet. The big concerns would have been Jet and Edgars stores," he says.
Some of the larger shopping centres would also have taken a knock, considering that Edgars can take up to 10% of their space. Sasse saysan Edcon failure would have been problematic for these centres.
"Across our portfolio we have maybe about eight of those centres and we would have had to reconfigure and relet."
While he didn’t believe a company making R3bn in operating profit (before the massive debt had to be repaid) would fold, others weren’t so sure.
Brookes told the Financial Mail that at various pointsbusiness rescue seemed like a more likely option than not — and then all bets would have been off for the landlords.
Had Edcon folded, says Wainer, it could have had a systemic impact on other retailers, spooking the entire industry.
"Psychologically, for some, for something like Edcon to go is not good for confidence. It would have also had a huge knock-on effect on its suppliers and employees."
But he says Brookes is an "excellent retailer and has identified what needs to be done".
Edcon’s bailout is a sliver of good news for a sector that hasn’t exactly shot the lights out for investors over the past six months.
Redefine’s share price has weakened 5.2% over that time, though it has edged up 2.7% over the past month. Growthpoint’s stock is up just 3.8% over the past six months, reflecting concerns over anaemic growth in the wider economy.