Fri 10/16/2020 03:45 AM
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Bank lenders to Future Group are making plans for a potential full financial restructuring of the group in case the INR 247.13 billion ($3.38 billion) deal with Reliance Industries Ltd. falls through, said two sources with direct knowledge of the matter. The lenders began making plans after Amazon Inc last week sent a legal notice to Future Group promoters for alleged breach of a non-compete clause by signing the RIL deal, the sources added.  Continue reading for the Asia Core Credit team's coverage of Future Group's upcoming financial restructuring negotiations, and request a trial to access reporting and analysis on hundreds of other credits.

The discussions among bank lenders to Future Group are going on even as the company has appointed EY India as advisor for a proposed one-time resolution of its debt under the Reserve Bank of India’s (RBI) Aug. 6 Covid-19 resolution framework, one of the above sources and a separate source with direct knowledge said.

The lender banks - who are still not releasing working capital funds to the distressed conglomerate - are separately discussing details such as whether a full restructuring would take place at the group or the opco level, the sources said. Banks are looking at whether their returns would be better under a full restructuring versus a one-time resolution.

Amazon has approached the Singapore International Arbitration Centre (SIAC), and claims that Future Group, in entering into a deal with RIL, breached the August 2019 contract under which the US ecommerce giant agreed to buy a 49% stake in Future Coupons Pvt. Ltd. (FCPL) for around $200 million, with a right to buy into Future Retail exercisable between the third and tenth year from the purchase, as reported.

FCPL is a group entity of the conglomerate, which owns 7.3% of Future Retail, and the arrangement gives Amazon India an around 3.6% stake in Future Retail, as reported.

Any legal action by Amazon Inc could potentially impact the pending Future Retail acquisition by RIL by scheme of arrangement.

The proposed scheme of arrangement will require Indian regulatory approval - from the Competition Commission of India - and such legal action by Amazon in the SIAC could possibly be considered by the regulator when it looks at the scheme transaction and whether to approve it, according to Reorg analysis.

Additionally, any significant legal action involving Future Retail is likely to give purchaser RIL pause for thought, given potential implications and associated costs - in terms of any damages which could be awarded and how these might impact the acquisition.

EY Talks

Lenders held a meeting on Oct. 12 to discuss Future Group’s one-time restructuring proposal, while EY made a presentation to the lenders on Oct. 13, one of the first sources and a source familiar with the matter said. But while some of Future Group’s large state-owned lenders, including State Bank of India, have agreed to look into the Future Group proposal, others have yet to decide on whether to consider the option, one of the above sources and a separate source with knowledge said.

Under the Reserve Bank of India’s Aug. 6 Resolution Framework, a resolution process can be invoked if 75% of the lenders by value and 60% by number agree to invoke the resolution process on accounts that were classified as standard and not in default for more than 30 days with any lending institution as on March 1.

Once the resolution process is invoked an intercreditor agreement (ICA) needs to be signed by all the lenders within 30 days of invocation, according to the Aug. 6 norms. Lenders that have signed the ICA will have to keep additional provisions of 10% on the post-resolution debt, while those which do not sign will have to make a provision of 20%, as reported.

If the lenders do not achieve required numbers and an ICA is not signed within 30 days from the invocation, it will be treated as lapsed and the resolution process cannot be invoked again under the Aug. 6 framework, according to the RBI guidelines.

The Covid-19 resolution framework needs to be invoked not later than Dec. 31 by the lenders and the resolution plan needs to be implemented within 180 days from the date of invocation, the framework states.

The Aug. 6 Covid-19 resolution framework is a part of the RBI’s Prudential Framework on Resolution of Stressed Assets dated June 7, 2019, as reported. The loans of Future Group companies are still standard in the books of bank lenders, according to the first two sources. RBI’s Aug. 6 resolution framework is applicable for borrowers which were classified as standard, but not in default for more than 30 days as on March 1, 2020.

Bonds Reaction

Lenders were previously only concerned about the potential haircut they might have to take once the Reliance deal gets regulatory approvals, as reported. But concerns over potential roadblocks from disgruntled holdco and opco lenders, the latter having refused to release working capital funds from opco lenders, had seen Future Retail’s $500 million 5.60% senior secured notes due 2025 lose around 10 points over a month to be stuck firmly in the 80s, down from the 94/96 levels reached in early September after the RIL deal was announced, as reported.

The bonds reacted again to news of Amazon’s notice and the due 2025s are indicated at 79/80 today, according to two buyside sources.

EY declined to comment. Future Group did not respond to requests for comment.

Read Reorg’s coverage of Future Retail HERE.

-- Rajhkumar K Shaaw, Dipika Lalwani
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