S&P Global Ratings on Thursday downgraded Future Retail to selective default (SD) on restructuring of onshore debt but kept the issue rating at CCC-minus.The downgrade comes after the company announced implementation of a one-time restructuring plan by its onshore lenders on debt aggregating Rs 10,200 crore. The restructuring has been approved under the resolution framework for Covid-related stress provided by the Reserve Bank of India.
Future Retail's liquidity position has weakened materially since March 2020, exacerbated by the strict lockdown imposed in India to contain the spread of Covid-19. The company's operating cash flows remain depressed, given a near 70 per cent decline in sales, said S&P.
Future Retail's existing long-term debt obligations (term loans and non-convertible debentures) will be extended from their original schedule by 18 to 24 months at existing interest rates. The term loans will now be repayable starting December 2021 and the non-convertible debentures will be repayable on June 30, 2025.
Overdues under its short-term working capital borrowings including interest will also be converted into working capital term loans and funded interest term loans to be repaid from December 2021. The company will have no interest and principal payments due on the restructured debt until September 2021.
"We view the restructuring as distressed and tantamount to a default because original terms of the loans have been changed without adequate offsetting compensation. The debt will be repaid later than originally promised and there is no additional collateral, amendment fee, or higher interest rates on the rescheduled payments," said S&P.
Moreover, the likelihood of a conventional default in the absence of this transaction was high owing to the company's weak liquidity and subdued operating performance, in our opinion.
"We kept the issue rating on Future Retail's 500 million dollars senior secured notes at CCC-minus because as of now, the company has been regularly servicing the semi-annual coupon on the notes. The notes are not covered under the regulations of the restructuring scheme and we do not foresee any changes in the terms of the issuance.
Future Retail is a pan-India retailer with about 1,388 stores across more than 400 cities.
On August 29 last year, Reliance Retail Ventures Ltd, a subsidiary of Reliance Industries Ltd, announced that it will acquire retail and wholesale business as well as logistics and warehousing business of Future Group. The completion of the deal has been delayed by legal issues.