Fitch affirms Future Retail at 'RD'

8 Apr 2022 , 03:37 PM

Fitch Ratings has affirmed Indian retailer Future Retail Limited’s (FRL) Long-Term Issuer Default Rating (IDR) at ‘RD’ (Restricted Default). Fitch has also affirmed FRL’s USD500 million 5.6% senior secured notes due 2025 at ‘C’, with a Recovery Rating of ‘RR5’.

The ‘RD’ rating reflects the uncured default in meeting repayment obligations on the bulk of FRL’s onshore debt that was restructured under the Indian central bank’s August 2020 One Time Restructuring (OTR) framework. We downgraded FRL to ‘RD’ in April 2021 after it completed the restructuring, as we viewed it a distressed debt exchange (DDE). However, the resultant debt structure and maturity profile remained unsustainable and did not meaningfully address FRL’s financial stress, which is required for an upgrade after the completion of a DDE.

The ‘RD’ IDR on the international scale indicates an issuer that, in Fitch’s opinion, has experienced an uncured payment default or a distressed debt exchange on a bond, loan or other material financial obligation, but that has not entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, and has not otherwise ceased business.

Uncured Default: FRL failed to repay INR88 billion in recast obligations under the OTR, comprising INR35 billion due on 31 December 2021, for which the grace period expired in January 2022, and INR53 billion due on 31 March 2022. This followed persistent operating losses since the financial year ending March 2020 (FY20) and ongoing litigation that has hampered FRL’s ability to generate funds from alternative sources.

The obligations under default constituted 80% of FRL’s restructured debt, underscoring its unsustainable maturity profile. FRL was also unable to pay the coupon on a INR2 billion domestic bond on 31 March 2022.

Risk of Deeper Restructuring: The risk of FRL undergoing a deeper restructuring or formal insolvency proceedings has risen in view of its default and the ongoing uncertainty in completing an announced business sale to an indirect subsidiary of Reliance Industries Ltd (RIL; BBB/Negative). A more conservative approach by onshore lenders, particularly after the closure of stores that accounted for 55%-65% of revenue in March due to non-payment of sub-lease rentals to RIL entities, can limit FRL’s ability in managing its daily liquidity needs, including servicing debt outside the OTR.

Falling confidence by lenders may present additional hurdles in obtaining lender approval for the sale.

ESG – Management Strategy: FRL has an ESG Relevance Score of ‘5’ for Management Strategy. We believe management continues to face multiple challenges. Persistently weak profitability since the onset of the Covid-19 pandemic and poor liquidity has impaired FRL’s financial flexibility, leading to default on restructured debt obligations under OTR. Ongoing litigation and delays around the sale transaction pose significant impediments to management’s strategy to improve financial flexibility. This has a negative impact on the credit profile and is highly relevant to the rating.

ESG – Governance: FRL has an ESG Relevance Score of ‘5’ for Governance Structure. The Biyani family pursued growth investment at its operating companies rather than limiting leverage and preserving balance-sheet flexibility at the holding company. This is evident from significant reduction in FRL’s main shareholder – Future Corporate Resources Pvt Ltd’s (FCRPL) stake after lenders invoked share pledges. The reduced stake may present additional hurdles in securing shareholder approvals for the sale transaction. This has a negative impact on the credit profile and is highly relevant to the rating.

We believe the restrictions in the bond documentation limit the risk of cash leakage to shareholders. Nonetheless, distress at shareholders has caused reputational damage, constraining FRL’s access to funding and liquidity.