Future Retail Ltd.
Future Group Lenders Negotiate Debt Treatment Under Reliance Industries Merger, Unnerved by Potential “Haircut”; Offered 60% to 80% Initial Debt Repayment, Remainder Staggered Over Upto 5 Years; Lenders Question Post-Merger FEL Cash Flows, Ability to Repay Residual Debt
Tue 02/16/2021 04:51 AM
Bank lenders are in ongoing negotiations with Future Group over treatment of their debt under the company’s proposed Scheme of Arrangement with Reliance Industries, and fear they face a “haircut”, as only 60% to 80% of their debt as of March 31, 2020 will be either repaid or transferred to Reliance Industries immediately under current plans, said two sources with knowledge of the situation.
Bank lenders are unhappy that only a portion of their debt will be settled or transferred to Reliance Industries through the merger, while holders of Future Retail’s $500 million 5.60% senior secured notes due 2025, along with Premji Invest and Edelweiss, would be settled in full or transferred to Reliance at culmination of the deal, said the first two sources and a third source with knowledge. Lenders are negotiating to be treated at par with other creditors, or want every creditor to be treated on a pro rata basis, two of the sources said.
The lenders question the cash flows of Future Enterprises Ltd. (FEL) after the merger, and therefore its ability to service the debt and make staggered payments over a proposed upto five-year payment period for the remaining 20% to 40% - FEL will hold the remaining debt that is not settled or transferred to Reliance Industries immediately under the Scheme, the sources said.
While the company - through its financial advisors EY - has presented detailed cash flow projections for FEL, and stated that it will become a contract manufacturer to Reliance Industries - and supply garments and processed foods to its stores - lenders note the revenue-generating business will be transferred to Reliance, and question the cash flows, two of the sources said.
To try to reduce lenders’ residual exposure to FEL post-merger, Future Group has offered to use proceeds from the sale of preferential warrants to Reliance Industries, as well as funds raised from the potential sale of its insurance business, two of the above sources said. The same sources said that cash set aside in an escrow account to meet any potential tax liability related to the deal can also be used for debt repayment in the event that no demand is raised.
The Aug. 29, 2020 Future Group release announcing the proposed INR 247.13 billion ($3.38 billion) Reliance Industries deal, notes that post-merger FEL will retain the manufacturing and distribution of fast-moving consumer goods, and integrated fashion sourcing and manufacturing business, and its insurance joint ventures with Generali and NTC Mills, as reported.
The company estimates that using these sources, debt remaining at residual FEL to be serviced from cash flows will be around INR 50 billion, two of the above sources said.
As part of the Scheme of Arrangement released on Sept. 16, Future Group’s opco lenders would have exposure of INR 108.66 billion in the remaining undertaking of FEL after the transfer of assets and liabilities to Reliance Industries, as reported.
Under that scheme, RIL subsidiaries would take over liabilities of Future Group companies up to March 31, 2020 aggregating INR 190.6 billion, as reported. Borrowings worth INR 126.12 billion, including Future Retail’s $500 million 5.60% senior secured notes due 2025, will be transferred at par to Reliance Industries, as reported.
The following two tables show transfer of Future Group companies’ external borrowings and trade payables to Reliance Group companies, according to the scheme of arrangement.
Transfer of retail and wholesale liabilities are as follows:
Transfer of liabilities of logistics and warehousing business is as follows:
Future Group did not respond to requests for comment.
--Rajhkumar K Shaaw, Dipika Lalwani
Bank lenders are unhappy that only a portion of their debt will be settled or transferred to Reliance Industries through the merger, while holders of Future Retail’s $500 million 5.60% senior secured notes due 2025, along with Premji Invest and Edelweiss, would be settled in full or transferred to Reliance at culmination of the deal, said the first two sources and a third source with knowledge. Lenders are negotiating to be treated at par with other creditors, or want every creditor to be treated on a pro rata basis, two of the sources said.
The lenders question the cash flows of Future Enterprises Ltd. (FEL) after the merger, and therefore its ability to service the debt and make staggered payments over a proposed upto five-year payment period for the remaining 20% to 40% - FEL will hold the remaining debt that is not settled or transferred to Reliance Industries immediately under the Scheme, the sources said.
While the company - through its financial advisors EY - has presented detailed cash flow projections for FEL, and stated that it will become a contract manufacturer to Reliance Industries - and supply garments and processed foods to its stores - lenders note the revenue-generating business will be transferred to Reliance, and question the cash flows, two of the sources said.
To try to reduce lenders’ residual exposure to FEL post-merger, Future Group has offered to use proceeds from the sale of preferential warrants to Reliance Industries, as well as funds raised from the potential sale of its insurance business, two of the above sources said. The same sources said that cash set aside in an escrow account to meet any potential tax liability related to the deal can also be used for debt repayment in the event that no demand is raised.
The Aug. 29, 2020 Future Group release announcing the proposed INR 247.13 billion ($3.38 billion) Reliance Industries deal, notes that post-merger FEL will retain the manufacturing and distribution of fast-moving consumer goods, and integrated fashion sourcing and manufacturing business, and its insurance joint ventures with Generali and NTC Mills, as reported.
The company estimates that using these sources, debt remaining at residual FEL to be serviced from cash flows will be around INR 50 billion, two of the above sources said.
As part of the Scheme of Arrangement released on Sept. 16, Future Group’s opco lenders would have exposure of INR 108.66 billion in the remaining undertaking of FEL after the transfer of assets and liabilities to Reliance Industries, as reported.
Under that scheme, RIL subsidiaries would take over liabilities of Future Group companies up to March 31, 2020 aggregating INR 190.6 billion, as reported. Borrowings worth INR 126.12 billion, including Future Retail’s $500 million 5.60% senior secured notes due 2025, will be transferred at par to Reliance Industries, as reported.
The following two tables show transfer of Future Group companies’ external borrowings and trade payables to Reliance Group companies, according to the scheme of arrangement.
Transfer of retail and wholesale liabilities are as follows:
Transfer of liabilities of logistics and warehousing business is as follows:
Future Group did not respond to requests for comment.
--Rajhkumar K Shaaw, Dipika Lalwani
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