The downgrade reflects the heightened risk to Future Retail’s liquidity position due to a sharp fall in its share price.
Fitch Ratings on Thursday downgraded Future Retail’s expected long-term issuer default rating (IDR) to ‘B-(EXP)’, from ‘BB(EXP)’, and the expected rating on its $500-million 5.6% senior secured notes due in 2025 to ‘B-(EXP)’ with a recovery rating of ‘RR4’ from ‘BB(EXP)’. The rating agency has simultaneously placed the ratings on Rating Watch Negative (RWN). Data from Bloomberg showed that total debt of Future Retail stood at Rs 3,841 crore as on December 2019.
The downgrade reflects the heightened risk to Future Retail’s liquidity position due to a sharp fall in its share price, which has prompted lenders at its promoter shareholder — Future Corporate Resources (FCRPL) — to demand more of Future Retail’s shares as collateral. “The sustained fall in Future Retail’s share price has lowered FCRPL’s flexibility to submit more shares as collateral. Nearly all of FCRPL 41.1% stake in Future Retail has been pledged to lenders and certain lenders are attempting to invoke pledges on shares that amount to an 8% stake in Future Retail following a breach of the collateral coverage requirement,” said Fitch Ratings.
All these issues have raised the risk of a reduction in the stake held by permitted holders, primarily the promoters — Amazon and related entities — which together hold around a 49% stake in Future Retail, to below 26%, a threshold that could trigger a change of control redemption on Future Retail’s dollar bond.
According to the rating agency, RWN reflects the high and immediate risk to the promoter group’s efforts to reduce share pledges and restore financial flexibility at FCRPL in a timely manner, particularly in the current challenging environment, which has seen a continuous drop in Future Retail’s share price amid the coronavirus pandemic. Future Retail’s liquidity position is vulnerable to a prolonged pandemic and a failure to resolve the debt situation at FCRPL could damage Future Retail’s relationships with lenders, compounding the overall liquidity risk. In the last six months, the share prices of Future Retail are down by 80.4%.