Fitch Ratings has affirmed Future Retail Ltd's (FRL's) issuer default rating at 'C' and the rating on its USD500 million 5.6 per cent senior secured notes due 2025 at 'C' while revising the recovery rating to 'RR5' from 'RR4'.
Fitch has also removed the rating watch positive, which had been placed on both ratings on September 2 last year after FRL's announcement it was selling its business to Reliance Retail and Fashion Lifestyle Ltd (RRFLL), an indirect subsidiary of Reliance Industries.
"The removal of rating watch positive underscores 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 which indirectly holds 4.8 per cent of FRL," said Fitch.
"FRL may also 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 Reserve Bank of India's August 2020 one-time restructuring framework that was introduced to help companies during the coronavirus pandemic.
Fitch said 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.
The revision in the US dollar notes' recovery rating reflects the lowering of recovery estimates after including in the waterfall analysis unpaid interest and accrued liabilities on onshore obligations from March 2020, when FRL opted for a debt-servicing moratorium, allowed by the central bank.
FRL's issuer default 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 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," said Fitch.
"Failure to secure lenders' approval for the one-time restructuring scheme or a triggering of a change-of-control event on its US dollar bonds will also cause immediate liquidity pressure."