Future Retail Downgraded to Near Default Rating of 'C' by Fitch on Missed Coupon Payment
Fitch Ratings has downgraded Indian retailer Future Retail Ltd's (FRL) long-term issuer default rating (IDR) to 'C' (near default) from 'CCC+', and the rating on its $500 million 5.6% senior secured notes due in 2025 to 'C' from 'CCC+', with the recovery rating remaining at 'RR4'. The downgrade follows FRL's announcement that it was unable to pay of the semi-annual interest payment of USD14 million on its US dollar bonds on 22 July 2020. Last week, Future Retail termed a news report 'purely speculative' and 'without any verification', which had said that the Kishore Biyani-led group was in talks to merge the company with Reliance Industries Ltd (RIL).
In a releases Fitch says, "The downgrade of FRL's ratings reflects that it has missed the coupon due on 22 July 2020 on its US dollar bonds. The company has a 30-day grace period to satisfy the payment obligations. The company continues to negotiate with banks for the release of further peak working capital facilities, which were due earlier in July, but which the company said were delayed due to procedural issues. It said that it will cure the missed payment when it receives cash inflows from further bank funding, the sale of assets or an equity injection from strategic or financial investors. However, if this does not happen during the grace period, this will constitute an Event of Default and Fitch will likely downgrade FRL's IDR and the rating on the bond to 'RD'."
Fitch says it believes that FRL does not have the funds to cure the missed payment and is dependent on release of new working capital lines to improve cash-flow and meet the payment during the grace period.
According to the ratings agency, liquidity position of Future Retail remains under severe pressure as a result of the India-wide coronavirus-related lockdown measures imposed by the government. "The Indian government relaxed some of the restrictions in June, which saw a slight pick-up in FRL's sales. However, recent localised outbreaks led to several states re-imposing restrictions - which do not currently have an end-date. Some of FRL's stores have remained open, but they sell mainly groceries and other essential items that carry lower margins than discretionary items, such as apparel," it added.
Future Retail has an environmental, social and corporate governance (ESG) relevance score of 5 for management strategy. Fitch says, "The inability of management to secure the release of the additional peak working capital facilities to improve cash flows and therefore pay the US dollar bond coupon shows that while the strategy may be coherent, management's ability to implement it has been hindered by the controlling shareholder's negotiations to obtain equity from or pursue divestments with strategic or financial investors and by the impact of the coronavirus on the business. This resulted in the downgrade of the IDR and bond ratings."
According to the ratings agency, key shareholders of Future Retail are evaluating multiple options to obtain equity from or pursue divestments with strategic or financial investors to reduce debt and free up pledged stakes of the company. "They (key shareholders) are also considering the monetisation of stakes in other entities and investment properties. These steps, if successful, will improve financial flexibility at the entities and reduce the risk of a change of control clause being triggered, which would give bondholders the option to redeem FRL's US dollar bonds," it added.
Bennett, Coleman & Company Ltd, the publisher of Times of India, along with its units, Brand Equity Treaties Ltd, Vardhaman Publishers Ltd and Dharmayug Investments Ltd are the second largest shareholders in Future Retail with 8.58% stake. IDBI Trusteeship Services Ltd, is second largest shareholder with 7.45% stake in the Biyani group company.
PI Opportunities Fund I and Pioneer Investment Fund (PAC) together own 5.59% stake in Future Retail. Others who hold significant stake in Future Retail includes Heritage Foods Ltd (3.29%) and Bharti Enterprises (Holding) Pvt Ltd (1.91%) as the company's regulatory filing. Heritage Foods was promoted by the family members of Andhra Pradesh's former chief minister N Chandrababu Naidu, which was bought over by Future Retail in 2016. As part of the deal, Heritage Foods received 3.65% stake in Future Retail, which was worth Rs295 crore at that time.
Last year in August, Amazon.Com NV Investment Holdings LLC acquired a 49% stake in Future Coupons Ltd. Future Coupons holds 9.82% in Future Retail. This, in other words mean, Amazon indirectly holds about 4.8% stake in Future Retail.
Two mutual funds hold 3.60% stake in Future Retail. This includes 1.63% stake by L&T Hybrid Equity Fund and 1.48% stake by IDFC Sterling Equity Fund, as per the data shared by the company with bourses.
Nonetheless, Fitch Ratings says, a subdued valuation, a high level of share pledges at the group's other listed entities and a lack of liquidity in the current environment pose risks to the execution of these plans. "Possible delays in finalising new investors and lenders enforcing their rights following the breach of collateral cover requirements could also present significant challenges, despite a court ruling providing interim relief until 31 July 2020 from lenders invoking pledges on FRL shares."
For governance structure, Future Retail has an ESG Relevance Score of 5, Fitch says, adding, "The constrained financial flexibility and impending risk of default at its main shareholder - Future Corporate Resources Pvt Ltd (FCRPL) - underscores the shareholder's aggressive approach in balancing growth investment at its operating companies with limiting leverage and preserving balance-sheet flexibility. This has a negative effect on FRL's rating."
"We believe the restrictions in the bond documentation limit the risk of cash leakage to FCRPL, but a default at FCRPL will cause significant reputational damage and could constrain FRL's ability to secure additional working capital lines to ease pressure on liquidity due to the coronavirus pandemic," the ratings agency added.
Promoter and promoter group, led by the Kishore Biyani family held a 40.73% stake in Future Retail as of 30 June 2020, through Future Corporate Resources Pvt Ltd (31.89%) and Future Coupons Pvt Ltd (Future Coupons Ltd) (9.82%).
In a regulatory filing, Future Retail had said that based on disclosures received from promoter and promoter group, certain lenders, who holds non-convertible debentures (NCDs) issued by promoter company or associates of promoter company and in whose favour some of the equity shares of the company held by promoters were pledged, have invoked such pledged shares.
"Post such invocation of the equity shares and considering the allotment upon conversion of warrants by FCPL during the quarter ended June 2020, the holding of promoter and promoter group in the company is 22.63 crore shares representing 41.73% on paid-up equity share capital. The majority of invoked shares, which are still held by certain lenders, can be transferred back to promoters upon satisfaction of the loan amount together with interest due thereon," it added.
Future Retail operates about 1,500 retail stores that cover over 16 million sq ft of retail space in 400 cities across India. It has large-format stores, Big Bazaar, its flagship chain, besides small store neighbourhood retail chains, EasyDay Club and Heritage Fresh.