Restructure to Breathe Again: Corporate Debt Restructuring

South African retail group Edcon Holdings Ltd. completed a complex restructuring on February 1, 2017, involving various creditor groups across the company’s capital structure to restructure a R29 billion debt burden. Negotiations took about 11 months before it was finalized. Now, the 89-year-old company is in the process of rebuilding its market share which shrunk over years of distress.

Edcon is South Africa’s biggest clothing retailer and it was doing very well until it started losing its market share to competitors Truworths, Mr Price and Foschini and ran into debts. Edcon was taken over by its creditors in 2016, in a $1.5billion debt-to-equity swoop, which reduced a significant chunk of its debt. As part of its turnaround plan, Edcon restructured its debt and begun closing chains, including Red Square cosmetics and Boardmans homeware, while increasing focus on its flagship Edgars clothing stores.

Like Edcon, Kenya Airways also had to restructure a $2 billion debt as part of its turnaround plan after heavy losses.  The national airline was doing well and was one of Africa’s leading airlines until a sudden fleet size expansion and increase in the number of routes pushed the carrier into loss.  The failed expansion strategy has caused Kenya Airways years of loss, but the airline hopes to do its turnaround strategy right, making its $2 billion debt restructuring as an integral part of the strategy which also includes increasing the number of routes. Today, losses are thinning out as the carrier continues to work its way back to profitability.

Things get bad for companies – to the extent of liquidation – for many reasons, but the two companies mentioned above will have a chance to remain in business because of an opportunity to restructure their debt.

Capital restructuring provides a lifeline to many companies in distress or facing challenges. The process however, typically involves a lot of painstaking procedures such as business strategy review and in-depth negotiation between the companies and their creditors, usually banks and other financial institutions. A well-executed restructuring exercise will result in a reduction in debt obligations of the company, better terms, increased tenor and reduced interest rates, all which will help to position the companies for better performance aiding, thriving, profitable and sustainable enterprise.

A good financial advisor will get a company what is best for it — a safe and secure exit from financial distress.

Eczellon Capital is in the business of rewriting the stories of companies with such burdens, as evidenced by our track record. This has helped companies out of financial and going concern distress.

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