Fitch downgrades Future Retail’s long-term issuer default rating to ‘C’

Our Bureau Mumbai | Updated on July 24, 2020 Published on July 24, 2020

A Big Bazaar hypermarket, operated by Future Retail Ltd   -  Bloomberg

Fitch Rating has downgraded Future Retail to ‘C’ from ‘CCC+’. This comes even as another rating agency, S&P warned of downgrading the company after it missed its payment of over ₹100 crore on Wednesday.

Fitch in its note said that it has downgraded the company’s Long-Term Issuer Default Rating (IDR) to ‘C’ from ‘CCC+’, and the rating on its $500 million 5.6 per cent senior secured notes due in 2025 to ‘C’ from ‘CCC+’.

For payments like these, companies are usually given a 30-day grace period. Post which, it is declared that the company has defaulted on payments. This comes even as Future Retail informed the exchanges on Thursday that it intends to make these payments with interest within the stipulated grace period.

However, Fitch added, “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’.”

On Friday, BusinessLine had reported that Future Retail was in talks with banks to get the line of credit open again to pay the interest. The sources said that a part of the line of credit had already come through, while the other tranche was due before next week.

This issue comes at a time when Future Retail and its holding company is facing severe liquidity crunch due to its mounting debt and a fresh blow of lower sales due to the pandemic.

The rating agency in its note said that while the Indian government relaxed some of the restrictions in June, which saw a slight pick-up in Future Retail’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 explained.

Fitch said that Future Retail’s liquidation value in a distressed scenario of around ₹7,700 crore from the liquidation of assets, which are composed primarily of inventory, receivables and owned property, plant and equipment (PP&E), as that is higher than its going-concern value of ₹5,000 crore.

Nonetheless, “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.”

A court ruling is currently providing interim relief to Future Retail until July 31, 2020 from lenders invoking pledges on Future Retail’s shares.

BusinessLine had reported that Kishore Biyani-led Future Group is in talks with Mukesh Ambani-led Reliance Industries Limited, which owns Reliance Retail for a stake sale.

However, it looks like the deal which was supposed to be sealed before June-end has been delayed by a few weeks more.

“Possible delays in finalising new investors and lenders enforcing their rights following the breach of collateral cover requirements could also present significant challenges,” Fitch concluded.

Nonetheless, according to company sources, it looks like Future Group and Reliance have ironed out the glitches and the deal has reached its final stage.

What also needs to be noticed is that the liquidity issue of Future Retail is not limited to the company alone. Of course, the company has mounting debts but, the fact that only a handful of its stores remain open, and sell only groceries because of subdued demand an lack of availability of stock is a common problem for the other Indian retailers as well. With little or no relief from the government, retailers seem to struggle even more.

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Published on July 24, 2020
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