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    Fitch removes positive outlook on Future Group due to delay in Reliance deal

    Synopsis

    In a rating note Fitch retained FRL's rating at C, a notch above the default or D grade on its $500 million 5.6% senior secured notes due 2025. Fitch said the removal of the postive outlook "underscores the significant delay in completing the sale, contrary to our previous expectations, after a legal challenge to the deal by an entity controlled by Amazon.com, Inc.

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    Fitch expects FRL to face more challenges in securing the required shareholder and creditor approvals for the sale.
    US based Fitch Ratings has removed its positive outlook on Kishore Biyani's Future Retail Ltd (FRL) due to the delay in the completion of its sale to Reliance Retail.

    In a rating note Fitch retained FRL's rating at C, a notch above the default or D grade on its $500 million 5.6% senior secured notes due 2025.

    Fitch said the removal of the postive outlook "underscores the significant delay in completing the sale, contrary to our previous expectations, after a legal challenge to the deal by an entity controlled by Amazon.com, Inc."

    Fitch expects FRL to face more challenges in securing the required shareholder and creditor approvals for the sale.

    "This is because the founding Biyani family's stake in FRL has been reduced following lenders' invocation of pledges on FRL shares. FRL and other Future Group entities that are part of the sale are negotiating with the lenders under the Indian central bank's August 2020 one time restructuring (OTR) framework that was introduced to help companies during the coronavirus pandemic," Fitch said.

    Earlier this week, ET reported that Biyani has offered to pay back an aggregate of Rs 6900 crore by selling its small format stores as part of a restructuring deal which will allow it to delay principal payments for two years and open access to fresh lines of working capital and term loans. The restructuring plan is being seen as an alternative to the Reliance deal which is now stuck in litigations.

    "The sale will be credit positive if completed successfully, although it no longer remains the immediate rating driver due to the uncertainty over the timing of its completion and the potential downward rating implications from the debt-restructuring process in the very near term," Fitch said.

    "FRL's rating of 'C 'reflects its continued financial stress amid the prolonged impact of the coronavirus pandemic, particularly in its higher margin non-food business that faces more restrictions due to its classification as a non-essential category. The second wave of the virus in India could further delay the recovery in FRL's cash flows during the financial year ending March 2022 (FY22) if the curbs are imposed more widely in the country. Failure to secure lenders' approval for the OTR scheme or a triggering of a change-of-control event on its US dollar bonds will also cause immediate liquidity pressure," Fitch warned.

    Fitch expects FRL's sales to drop by 71% in fiscal 2021 due to pandemic-related curbs in 2020 and sales in fiscal 2022 to remain about 30% lower than FY20 as the virus' resurgence after March 2021 will slow the normalisation of its business. It estimates the company's earnings before interest tax depreciation and amortisation margin to turn negative 17% in FY21 from a growth of 2.8% last fiscal on weak sales, which counterbalanced cost-saving initiatives implemented during the pandemic, before improving to 2.3% in fiscal 2022 on the back of normalising sales, particularly from the more profitable non-food segment.

    Invoking restructuring has helped banks to treat the loans as current despite payment delays. But failure to implement the OTR by 26 April 2021 will lead to a conventional default if FRL fails to service the debt subsequently in line with the terms.

    "If the lenders agree on the OTR within the deadline, Fitch will evaluate the final terms to assess if they amount to a distressed debt exchange (DDE). Fitch understands that FRL is in talks with onshore lenders to implement the OTR before the deadline," the rating agency said.


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