Future Retail Ltd.
TEAR SHEET: Future Retail Cash Flow Tested With July Interest Payment; Reorg Estimates 75% Footfall Recovery Needed to Reach Positive EBITDA; M&A Speculation
Fri 06/05/2020 05:36 AM
Relevant Documents:
Tearsheet in Excel on Reorg Analysis Page
OC $500 Mn 5.6% Sr Sec Notes Due 2025
OC NCD due 2022/2023
Future Retail Annual Report FY19
Investor Update Feb 2020
Investor Update March 2020
3QFY20 Earnings Release
2QFY20 Earnings Release + Investor Presentation
Trust Deed Rural Fairprice Wholesale
Trust Deed Future Corporate Resources Ltd
Deferred, Onshore Bond (NCD) Payment Due June 3
OC INR 2Bn NCD Due 2023
Indian household consumer retail company Future Retail Limited’s (FRL) market capitalization eroded by 71.2% (in INR terms) year to date (June 5), due to the onset of the pandemic and even more so the six notch rating downgrade by S&P that occurred through April 23. The downgrade was driven by an increase in gross debt (pro-forma) by 2.2x since March last year to $864 million, sale of pledged shares, malicious rumors, and the freeze of operations of most of its stores because of the lockdown.
The maiden US Dollar-bond offering has faced downward pressure since the pandemic became widespread globally around the middle of February. The problem was compounded with a rumour floated on a whatsapp message and later IDBI trusteeship invoking sale of pledged shares (see chart above) in the beginning of March (however, the two events are not connected). FRL’s 5.6% $500 million bond was issued on Jan. 14, 2020 and has since declined 56.02 points to 45.36 on June 5 (between Feb17 till date; bid price). India announced a nationwide lockdown on March 24, 2020 (which was extended four times, till May 31 with Easdown-1 commencing from June 1) allowing only essential items and groceries to be sold. The bond price fell to 67.4 on March 24 and has since declined further to 28.4 on May 6 before recovering to 45.36 on June 5 (bid prices).
Prices have picked up at various points on the rumors of possible M&A. Sources tell Reorg a trade was concluded on May 7 for $25 million at 33.59% bid yield.
M&A Buzz and Amazon Deal in 2019
Local news media in India is rife with speculation of Amazon possibly taking a direct stake in Future Retail. The share price jumped 9.9% and closed at INR 80.6 on May 8 from INR 73.37 on May 6 (BSE India prices). FRL issued a clarification on May 7 stating it could be evaluating various business opportunities but hadn’t entered into a legally binding agreement or any understanding in writing with any party.
Amazon, through its entity Amazon.com NV Investments Holdings LLC, acquired a 49% stake (both voting and non-voting shares) in Future Coupons Private Limited (FCPL) (please refer to ‘Corporate Structure’) for $200 million on Nov. 28, 2019. The stake purchased by Amazon valued the issuer at $5.591 billion and gave (via FCPL) a 3.58% stake in it, Reorg estimates. The current market capitalization of Future Retail is $687 million or INR 51.79 billion as of June 5, according to Reorg calculation based on 542 million shares outstanding at a price of INR 98.20 (BSEIndia).
In a hypothetical M&A transaction, Amazon, without triggering an open offer, can acquire up to 24.99% in total, directly, into the issuer. According to Reorg estimates, at INR 98.2 per share (BSE trading price on June 5), the deal value could be INR 10.75 billion for additional 20.19% in FRL. In such a situation the deal is most likely to be a BLOCK deal with maximum variability of + / - 1% in the current price of the day (pre-trading hours) or previous day closing price. There is a mandatory open offer above 25% as per SEBI (Substantial Acquisition of Shares and takeovers) Regulation, 2011.
An illustrative Amazon’s acquisition of shares (on a fully diluted basis) without triggering the open offer requirement is shown below.
We said above that Amazon could consider buying FRL stake directly rather than buying the promoter’s (FCRPL) shares because the latter pledged its shareholding in FRL and has defaulted under certain NCDs (as discussed in section ‘Current NCD Defaults, Bombay Court Proceedings’ ).
Given that the total market capitalization of FRL today (June 5) stands at INR 51.79 billion against a total value of pledge of INR 6.231 billion and as FCRPL’s shares in FRL are still encumbered as of May 27, Amazon could be considering buying stake directly in FRL instead.
Amazon also has a call option, exercisable between three to 10 years to acquire all or part of the promoters’ shareholding in FRL (or the issuer). In the post-conversion of warrant scenario, the promoter FCRPL will hold 41.1%, which Amazon can buy entirely.
Alternatively, according to offer circular for the USD bond issued in January 2020, upon consummation of the transaction, FCPL is expected to own a 9.8% stake in FRL (on a fully diluted basis), which includes:
The proposed structure as per OC of USD bond due 2025 is shown below.
As per the latest filings, the warrants are fully converted as of May 2020 and the proposed structure could be implied to be in place (refer to section on ‘Corporate Structure’ ). Though there is no official announcement.
Important to note, the Change of Control (CoC) clause is unlikely to be triggered if Amazon.com NV Investment Holdings LLC or Amazon.com, Inc. - or any entity which Amazon and or its direct or indirect wholly owned subsidiaries own or holds more than 50% of the shares, economic interest, ownership interest and/or voting power - increases its stake in the issuer. As per the bond indenture, Amazon is categorised as a “permitted holder” and is carved out of the CoC trigger.
Other players also in fray for M&A as per Mint, a local newspaper, Blackstone might be interested. The promoters otherwise could be looking to sell in part or full stake in other group companies, as Reorg reported. It is also likely, as per Reorg, that the promoters could bring in equity infusion or issue additional preferential securities to FCPL.
Like many other retailers, the issuer is going through acute disruption in its business operations since March 24. In its call with USD bondholders and rating agencies on March 10, FRL highlighted that demand for non-discretionary goods remained inelastic irrespective of the macroeconomic situation. Later, however, in its communication to the stock exchange on March 22, FRL intimated the regulator of severe disruption in business.
Following the call, both S&P and Fitch downgraded the issuer. S&P downgraded FRL to B- from BB- on March 27 citing reasons of operational uncertainties, heightened liquidity risk, and weak financials. Fitch downgraded the issuer to B- from BB on April 4 citing similar reasons. The current rating stands at CCC- by S&P and CCC+ by Fitch.
A snapshot of rating history of the life of $500 million 5.6% Senior Secured due January 2025 bond is shown below.
Despite management’s efforts, after the call, FRL’s bond price declined from 75 (or indicative mid yield 12.321%) on March 9 to 26.878 (indicative mid yield 42.991%) on May 5 (when Fitch downgraded the issuer to CCC+). As noted above, the 2025 bonds were last indicated at 45.36 on June 5 according to buy-side sources.
Impending Coupon Payments
Offshore bondholders’ reaction could be driven by the perceived risk of a non-payment of the upcoming coupon due on July 22 because of almost non existent cash inflow from business and a low cash available at hand during this pandemic period. The coupon payment due on June 3 also concerns onshore NCD holders as the payment of annual coupons of INR 211.935 million on two outstanding NCDs has been deferred as the company cited disruption in regular cash flows and working capital, per filing with the exchange on June 3. FRL intends to pay them over two months in tranches. The total cash outflow (in dollar terms) on offshore and onshore coupons, combined, are estimated to be $16.8 million against a cash balance of $21 million as of Sept. 30, 2019, however the latter has likely changed significantly to date.
The coupon amounts (in million) due in June and July on FRL’s outstanding USD bond and INR onshore bonds are as follows:
Offshore Notes
The cross default provision in the offshore notes includes a $15 million threshold applicable to the principal of other FRL (or restricted subsidiary) indebtedness and does not include a trigger for the non-payment of interest/coupons, only the non-payment of principal payments and an acceleration of the debt prior to its stated maturity. The principal under each NCD, which is issued by FRL, is approximately $13 million -- therefore the NCDs are unlikely to fall within the offshore notes cross default trigger as they do not meet the debt threshold.
However, should FRL fail to make the coupon payments under the NCDs, and if after being accelerated, holders of the NCDs start involuntary proceedings against FRL (or a restricted subsidiary) i.e. seeking the appointment of a receiver, trustee and such appointment remains undismissed and unstayed for 60 consecutive days or any similar voluntary action by FRL (or a restricted subsidiary) is taken to, then this would trigger an event of default under the offshore notes -- which applies an automatic acceleration provision.
In terms of FRL’s ability to raise cash via asset sales, the offshore notes contain an asset sale provision which applies to FRL and the restricted subsidiaries. The provision sets out that asset sales are permitted as long as there is no default, consideration received is fair market value and is at least 75% is in cash or temporary cash investments, or replacement assets -- the latter weakens the protection.
In addition, if the asset sale involves FRL or the restricted subsidiaries selling or disposing of all or substantially all of the capital stock of any restricted subsidiary or all or substantially all of the assets that constitute a division or line of business of FRL or any restricted subsidiary must have been able to incur $1 of indebtedness under the ratio debt basket or would have a consolidated leverage ratio equal to or lower than the actual consolidated leverage ratio immediately prior to such asset disposition.
There is no requirement to provide holders with a fairness opinion if FRL receives a replacement asset involving aggregate consideration in excess of a certain dollar threshold.
Net proceeds from an asset sale can be applied by FRL or a restricted to:
Onshore NCDs
The cross default provisions of the onshore NCDs due 2022 and 2023s detailed in the offering circular are applicable to indebtedness of any entity controlled by promoter controlled Future Corporate Resources Private Limited, Future Enterprises Limited, FRL, subsidiaries of FEL and Future Corporate Resources Private Limited.
Therefore it has a broader application than the cross default provision under the offshore notes and it catches indebtedness under the offshore notes issued by FRL. The NCDs cross default provision does not include an indebtedness threshold.
Any non-payment of the coupon under the FRL issued offshore notes would likely trigger the cross default provision detailed in the NCDs, as ‘interest payments’ may constitute “Financial Indebtedness” as defined in the NCD certificate.
However, the cross default provision applies a 60 a day cure period to non-payment of interest/coupons -- which is likely to be in addition to the 30 day grace period under the offshore notes that is applicable to coupon payments.
As mentioned above, FRL has deferred annual coupon payments on two outstanding NCDs over a period of two months.
Like the offshore notes, the NCDs also include event of default provisions which would be triggered if corporate insolvency resolution process (CIRP) or liquidation proceedings are started against FRL, subject to no event of default being triggered if the CIRP are started by a financial creditor and discharged within 5 days or an operational creditor and discharged within 15 days of the date of the insolvency application being filed.
In addition, an event of default will be also be triggered if a suspension of payments, moratorium - by way of voluntary arrangement such as a scheme of arrangement - or a compromise, arrangement with a creditor occurs, or the enforcement of security takes place or the appointment of liquidator, receiver or administrator is made -- the provision states that no event of default will be triggered if the insolvency appointment is dismissed within 60 days.
Unlike the offshore notes, the NCDs do not provide an automatic acceleration trigger for the ‘insolvency’ related event of default provisions. Acceleration of the NCDs requires majority holder consent -- 51% of the nominal amount of debentures then outstanding.
A further event of default may be triggered under the NCDs if a change of control is triggered and it results in Future Corporate Resources Private Limited ceasing to (i) own, directly or indirectly, 26% of the issued and paid up equity shares of FRL, (ii) have the ability to appoint majority of the board of directors of FRL, (iii) have the power to direct the management and policies of FRL and (iv) have the power to control and direct the business, operations and functioning of FRL.
For completeness, the onshore NCDs do not include a grace period for the non-payment of interest (but do allow a one day grace period for defaults due to technical error). The NCDs include a 2% default interest step up mechanism which applies to both delays with principal redemption and interest payments.
Current NCD Defaults, Bombay Court Proceedings
The Future Retail Group has defaulted on its INR 3.2 billion NCDs. They were issued by Rural Fairprice Wholesale Limited under a trust deed dated Jan. 12, 2018 and INR 6 billion NCDs issued - via two series - by Future Corporate Resources Limited under a trust deed dated April 10, 2019.
The default was triggered because the mark to market losses were not covered under the minimum security coverage mechanics -- which requires the company to maintain a certain loan to value ratio with either a cash or share top up required if the underlying value of the pledged shares falls.
Per the trust deed the share price was INR 350 per share when the deed was executed between a promoter company (Rural Fairprice) and IDBI Trustee. Due to COVID-19, the share price declined 76.4% to 80.6 on May 8, creating a mark to market losses of INR 4.796 billion (Reorg estimates). As such the promoter had to supply with cash or additional security to keep the coverage at 2.5x. Future Retail traded at INR 98.2 per share (BSE) on June 5.
On March 20, IDBI Trusteeship Services, the NCD security trustee of Future Corporate Resources and Rural Fairprice Wholesale, invoked the pledge held over 8% of the shares of FRL, due to the occurrence of an event of default, as reported. This is another aspect which Fitch considered before downgrading the issuer to B- as per the April 2 report (current FRL Fitch rating at CCC+).
Shortly after the event of default under the NCDs and an attempted enforcement of the share pledges, Rural Fairprice and Future Corporate Resources filed an ad-interim prayer in the Bombay High court seeking an injunction to block the sale of pledged FRL shares by IDBI Trusteeship Services Ltd. -- which the Bombay court granted on March 30.
The Bombay High Court suggested Rural Fairprice Wholesale Ltd. to consider providing additional security to its debenture holders. Despite the Future Retail group making a proposal to offer a charge on an immovable property as additional security, UBS AG stated that the proposed additional security is not “commercially viable,” according to a May 15 order by the Bombay High Court. The Bombay court is hearing arguments on whether the stay on enforcing the share security should continue.
Given that the issuers under the defaulted NCDs are Rural Fairprice Wholesale Limited and Future Corporate Resources Limited - subsidiaries of promoter controlled Future Corporate Resources Private Limited - a default under the NCDs may have triggered a cross default under the NCDs due 2022 and 2023 (see application of cross default provision detailed above) -- as ‘debentures’ look to fall within the definition of “Financial Indebtedness” as defined in the NCD certificate and the provision catches both a non-payment or acceleration prior to maturity as a result of an event of default of the underlying indebtedness.
As detailed above, the cross default provision under the NCDs applies a 60 a day cure period to a non-payment, which would have already expired based on the share pledges being invoked on March 20 -- if the debt under the debenture trust deeds is accelerated prior to their maturity, no such cure period applies.
Even with the possible cross default under the due 2022 and 2023 NCDs, creditors may be refraining from acting, given the ongoing proceedings in the Bombay court and combined with Franklin Templeton Mutual Fund’s decision on April 29 to - in accordance with RBI policy which has provided a moratorium on ‘term loan’ repayments until May 31 and which has since be extended to August 31 - grant a moratorium to three Future Group entities in relation to their NCDs obligations which were falling due.
It may be the case that Future Retail group creditors, including those under the due 2022 and 2023 NCDs, may now be waiting to see the outcome of the Bombay court proceedings before taking further action even if cross defaults have occurred -- due to the uncertainty surrounding potential security enforcement and whether any action can be taken given the RBI moratorium, should the NCDs fall within the definition of ‘term loans’.
For completeness, as the cross default provision under the offshore notes only applies to FRL and its subsidiaries, a default under the debenture trust deeds of the NCDs is therefore unlikely to trigger it.
Increased Leverage
Furthermore, since the end of the previous financial year until March 10, the issuer’s debt load has gone up two-fold. FRL ’s proforma gross debt has increased by 2.22x to $864 million as on March 10, 2020, from $388.4 million for the period ended March 31, 2019. However, the EBITDA for nine month ended Dec. 31, 2019 doubled to INR 20.45 billion as compared to full year 2019 EBITDA of INR 10.6 billion, per Reorg estimates. The bump in EBITDA is due to change in Indian Accounting Standard AS-116, which added INR 5.841 billion in the first two quarters of FY20. Unadjusted nine month EBITDA as per company presentation is INR 9.089 billion for period ended Dec. 31, 2019.
The historical leverage profile of Future Retail as of Dec. 31 is shown below.
Impact of change in accounting standard AS116 is HERE.
Unrestricted cash stood at $385.6 million as of March 10 (pro-forma) according to Reorg estimates. Furthermore, sources have confirmed that the banks have granted at least 15% (or INR 6.5 billion) additional ad-hoc peak festive season working capital limit, as reported.
The issuer’s standalone Pro-forma Capital Structure as of March 10 is shown below:
The gross debt figure is adjusted for payment of INR 15 billion made towards FRL’s working capital loans, as stated in the March 10 investor presentation. The money received came by way of equity infusion of INR 15 billion from FCPL. As per the same presentation, the amount paid could be remainder payment towards conversion of 24.8 million equity share warrants (out of 39.6 million) issued by FRL in 2019. According to the latest filing by the company with the exchange, the warrants stand fully converted. Post conversion the equity share base has increased to 542.2 million shares as of March 31 from 502.59 million on Dec. 31, 2019.
On the same call with bondholders and rating agencies, the company disclosed that it paid INR 35.6 billion towards ‘target asset acquisition’, the core reason for raising $500 million offshore in Jan 2020 as defined under ‘Use of Proceeds’ in $bond OC.
The target asset purchase as defined in OC was a purchase from FEL of in-store retail infrastructure assets such as furniture, fixtures, fittings, electric equipment, and IT infrastructure required for retail outlets.
FRL had given corporate guarantees to another group company, Future Enterprises Limited (FEL), for various borrowings undertaken by FEL. After extinguishing such cross guarantees, FRL would be saving nearly INR 6.5 billion per management guidance. It would also de-risk the company from cross-default in future; it can record assets in its books, reduce lease expenses, and charge depreciation.
Corporate Guarantees By FRL
As per FEL’s annual report FY2019 disclosures, the total value of cross guarantees stood at INR 35.826 billion as shown below.
Fitch in its report dated April 2, stated the following rationale for the downgrade.
When the US dollar bond was issued, it was unsecured and was supposed to be collateralized within 150 days after the original date of the bond issuance i.e. Jan. 22, 2020.
Reorg estimates that documentation for creating a charge on the assets could be completed by June 19, which is the deadline for terms and conditions of the bond issue implementation. Two private law firm sources have indicated that registration and notary work are ongoing despite the lockdown.
Business Operations, Liquidity and Cash Burn
As noted above, the company’s operations are severely hampered during the lockdown period. The Indian government only allows the sale of essential items such as food and groceries. Malls, shopping complexes and market areas remain shut and standalone stores dealing in food and groceries remain open.
FRL has large format stores located in malls, shopping complexes and market areas. Another sister brand, Easyday, a miniformat retailing brand of FRL (or also known as ‘neighbourhood store’) dealing in daily essential supplies were in operation.
Should the lockdown be lifted before June 30, cash flow that could be generated by the end of July. We assume that revenue contribution from food sales remains 33%, which is consistent with the ratio of food sales to non-food sales of 33:67 for two consecutive financial years and nine month ended Dec. 31, 2019.
We also assume at least 75% of the FY19 footfalls would return in July and revenue per footfall returns to pre-lockdown levels of INR 575.1 per footfall. It's also possible, and in our assumptions, that FRL will apply for RBI- sanctioned moratorium (COVID19 related relief) available till August 31 on payments of interest and principal.
The assumptions are as follows:
Based on the assumptions above, Reorg estimates Future Retail’s losses before taxes ranging from negative INR 5.6 billion to negative INR 800 million, between April to July, depending on either our bear or base case.
If FRL witnesses the return of footfalls to at least 75% of FY19 level by July, Reorg estimates that FRL can generate positive EBITDA of INR 287.8 million. Estimating for depreciation and amortisation and bond coupon outflow through July, there would be a loss of nearly INR 818.7 million, which is significantly lower when compared with a lower footfall or lockdown scenario.
An illustration of COVID impact on revenues and cash flows (not adjusted for inflation) is shown below.
The sensitivity analysis below shows EBT variability with increase or decrease in footfalls - split into monthly run rate - at 75% of FY2019 footfalls.
Any footfall less than 75% of FY19 actual footfall could widen operating losses given the absence of cash flow and thus constrained liquidity.
We haven’t assumed any deferral on the rent / lease payment in the calculations above. However, one source commented to Reorg that FRL could be talking to the lessors for forbearance on rental/lease payments.
In such a scenario, considering a 100% forbearance on rentals/ lease payments, the EBITDA would expand to INR 985.6 million from INR 287.8 million and therefore FRL would see a relatively lower amount of losses before taxes i.e.INR 121 million instead of loss of INR 818 million at 75% of FY2019 footfalls in the month of July post coupon payment .
Impact at Earnings before taxes level (in case of forbearance of rents/leases payments):
Working capital requirements during these four months (April to July) could come from existing revolver facilities tied up with the banks. According to company’s disclosures in the US dollar bond OC, the issuer has consortium agreement dated Aug. 23, 2017 with the banks for INR 57.5 billion, known as ‘Working Capital Facility’, which can be tapped as and when required. As per the pro-forma liquidity, unrestricted cash available with the issuer is estimated to be $385.6 million. Also, as mentioned above, the company has been granted 15% of ad-hoc working capital facility by the banks. Store operations could run smoothly with this facility. We have also considered reduced lease payments as FEL cross guarantees have been paid off, as per the management.
The standalone financial summary of FRL for the period ended Dec. 31, 2019 is shown below.
Corporate Structure
Future Retail Limited (FRL) is owned and managed by Kishore Biyani who is also the Chairman and Managing Director of the company and by his cousin, Rakesh Biyani, Jt Managing Director in the company. Kishore Biyani is a first-generation entrepreneur and considered to have pioneered modern retailing in India.
Kishore Biyani is also a founder of Future Group. Future Group is one of the leading players in Indian consumer products and retail industry with a prominent presence across food, FMCG, apparel, logistics, and financial services.
FRL is a leading retailing business in India with 1,550 stores, 12.8 million square feet of retail space, and a revenue of over INR 201 billion as of Jan. 4, 2020. It has successfully implemented a multi-format retail strategy across large and small format stores that captures
a wide consumer base, which is categorized into (i) hypermarkets, supermarkets, and convenience stores, (ii) value fashion, and (iii) consumer durables and electronics. It operates its hypermarket chain under the name of Big Bazaar.
As of Jan. 4, 2020, FRL is organized as follows:
As per the shareholding summary available for fiscal ended March 31, the promoter group companies, Future Corporate Resources (FCRPL) and Future Coupons Private Ltd (FCPL), own 31.89% and 9.82% stake in Future Retail respectively on fully diluted basis i.e. post equity warrants conversion. The structure is in line as proposed under US dollar bond issuance.
Pledged shares of Future Retail, at the promoter level, have gone up to 74.9% for the year ended March 31 from 57.77% as of Dec. 31, 2019. Of which, FCRPL now holds 31.89% (down from 44.28% in the previous quarter) and 98.02% of its shares in FRL are pledged.
The remaining 59.69% shares are held by the public as of March 31.
Share warrants to promoters
FRL was issued 39.60 million equity warrants to the promoter group entity, Future Coupons Private Limited (FCPL), on April 23, 2019, according to USD bond OC due 2025. Total consideration of warrants was INR 20 billion and to be exercised 18 months from the date of allotment (i.e. on or before Oct. 22, 2020). The company received 25% of the warrant issuer price of INR 5 billion initially. The issue price of the equity warrants was INR 505 per warrant.
As per the latest information filed with exchange by FRL, the warrants have been fully converted and the remaining INR15 billion has been fully paid off.
The warrants that FCPL holds would convert into 7.3% of the paid-up equity share capital of the company on a fully diluted basis i.e. post-conversion of warrants.
New funding and RBI Measures
Future Retail and its promoters have been raising new funding. On May 29, FRL issued senior secured NCD due June ‘23 to raise INR 2 billion with annual coupon of 9.95%. The new issuance was subscribed by Union Bank of India, which rolled over its debt as NCD. The board of FRL has already approved the resolution to raise up to INR 6.5 billion funding via secured/ unsecured redeemable non-convertible debentures on private placement basis, as reported.
The INR 2 billion NCDs were likely subscribed by a state-run bank under INR 500 billion targeted long term repo operations 2.0 (TLTRO), announced by the Reserve Bank of India on April 17, to channel liquidity to small and mid-sized corporates, including non-banking financial companies (NBFCs) and micro finance institutions (MFIs), that have been impacted by COVID-19.
Under TLTRO, banks raise money from RBI at a repo rate of 4% and use the proceeds to invest in investment grade bonds, commercial paper (CPs) and non-convertible debentures (NCDs) of these corporates, according to RBI guidelines. The securities bought under TLTRO have to be held to maturity (HTM) in books of the banks, the guidelines added.
Furthermore, the Future Group is also looking to sell its logistics business. Another group company, Future Consumer, is planning to raise INR 3 billion in capital via rights issue, as reported by Reorg.
EY India is working with Future Retail to assess its working capital requirements, while Arpwood Capital is advising the promoters on an equity stake sale, as reported.
Conclusion
Distressed investors will be keenly watching for a timely coupon payment of USD bond on July 22, re-start of normal business operations, reduction in share pledge by promoters, and avoidance of Event of Default situations. Another important event likely to be watched closely would be covenant testing on Sept. 30, 2020.
Going forward, investors would likely hope to see a simplified group structure with no or less cross guarantees.
-- Manish Kumar, Jeff Burton
Tearsheet in Excel on Reorg Analysis Page
OC $500 Mn 5.6% Sr Sec Notes Due 2025
OC NCD due 2022/2023
Future Retail Annual Report FY19
Investor Update Feb 2020
Investor Update March 2020
3QFY20 Earnings Release
2QFY20 Earnings Release + Investor Presentation
Trust Deed Rural Fairprice Wholesale
Trust Deed Future Corporate Resources Ltd
Deferred, Onshore Bond (NCD) Payment Due June 3
OC INR 2Bn NCD Due 2023
Indian household consumer retail company Future Retail Limited’s (FRL) market capitalization eroded by 71.2% (in INR terms) year to date (June 5), due to the onset of the pandemic and even more so the six notch rating downgrade by S&P that occurred through April 23. The downgrade was driven by an increase in gross debt (pro-forma) by 2.2x since March last year to $864 million, sale of pledged shares, malicious rumors, and the freeze of operations of most of its stores because of the lockdown.
Click HERE to enlarge
Source: BSE India, BEV
Source: BSE India, BEV
The maiden US Dollar-bond offering has faced downward pressure since the pandemic became widespread globally around the middle of February. The problem was compounded with a rumour floated on a whatsapp message and later IDBI trusteeship invoking sale of pledged shares (see chart above) in the beginning of March (however, the two events are not connected). FRL’s 5.6% $500 million bond was issued on Jan. 14, 2020 and has since declined 56.02 points to 45.36 on June 5 (between Feb17 till date; bid price). India announced a nationwide lockdown on March 24, 2020 (which was extended four times, till May 31 with Easdown-1 commencing from June 1) allowing only essential items and groceries to be sold. The bond price fell to 67.4 on March 24 and has since declined further to 28.4 on May 6 before recovering to 45.36 on June 5 (bid prices).
Prices have picked up at various points on the rumors of possible M&A. Sources tell Reorg a trade was concluded on May 7 for $25 million at 33.59% bid yield.
M&A Buzz and Amazon Deal in 2019
Local news media in India is rife with speculation of Amazon possibly taking a direct stake in Future Retail. The share price jumped 9.9% and closed at INR 80.6 on May 8 from INR 73.37 on May 6 (BSE India prices). FRL issued a clarification on May 7 stating it could be evaluating various business opportunities but hadn’t entered into a legally binding agreement or any understanding in writing with any party.
Amazon, through its entity Amazon.com NV Investments Holdings LLC, acquired a 49% stake (both voting and non-voting shares) in Future Coupons Private Limited (FCPL) (please refer to ‘Corporate Structure’) for $200 million on Nov. 28, 2019. The stake purchased by Amazon valued the issuer at $5.591 billion and gave (via FCPL) a 3.58% stake in it, Reorg estimates. The current market capitalization of Future Retail is $687 million or INR 51.79 billion as of June 5, according to Reorg calculation based on 542 million shares outstanding at a price of INR 98.20 (BSEIndia).
In a hypothetical M&A transaction, Amazon, without triggering an open offer, can acquire up to 24.99% in total, directly, into the issuer. According to Reorg estimates, at INR 98.2 per share (BSE trading price on June 5), the deal value could be INR 10.75 billion for additional 20.19% in FRL. In such a situation the deal is most likely to be a BLOCK deal with maximum variability of + / - 1% in the current price of the day (pre-trading hours) or previous day closing price. There is a mandatory open offer above 25% as per SEBI (Substantial Acquisition of Shares and takeovers) Regulation, 2011.
An illustrative Amazon’s acquisition of shares (on a fully diluted basis) without triggering the open offer requirement is shown below.
Source: FRL shareholding as of March 31, 2020
We said above that Amazon could consider buying FRL stake directly rather than buying the promoter’s (FCRPL) shares because the latter pledged its shareholding in FRL and has defaulted under certain NCDs (as discussed in section ‘Current NCD Defaults, Bombay Court Proceedings’ ).
Given that the total market capitalization of FRL today (June 5) stands at INR 51.79 billion against a total value of pledge of INR 6.231 billion and as FCRPL’s shares in FRL are still encumbered as of May 27, Amazon could be considering buying stake directly in FRL instead.
Amazon also has a call option, exercisable between three to 10 years to acquire all or part of the promoters’ shareholding in FRL (or the issuer). In the post-conversion of warrant scenario, the promoter FCRPL will hold 41.1%, which Amazon can buy entirely.
Alternatively, according to offer circular for the USD bond issued in January 2020, upon consummation of the transaction, FCPL is expected to own a 9.8% stake in FRL (on a fully diluted basis), which includes:
- 7.3% of the equity share capital of the company post-conversion of warrants and
- Additional 2.5% stake in FRL which has been transferred by FCRPL to FCPL.
The proposed structure as per OC of USD bond due 2025 is shown below.
Source: OC 5.6% 2025 bond due 2025
As per the latest filings, the warrants are fully converted as of May 2020 and the proposed structure could be implied to be in place (refer to section on ‘Corporate Structure’ ). Though there is no official announcement.
Important to note, the Change of Control (CoC) clause is unlikely to be triggered if Amazon.com NV Investment Holdings LLC or Amazon.com, Inc. - or any entity which Amazon and or its direct or indirect wholly owned subsidiaries own or holds more than 50% of the shares, economic interest, ownership interest and/or voting power - increases its stake in the issuer. As per the bond indenture, Amazon is categorised as a “permitted holder” and is carved out of the CoC trigger.
Other players also in fray for M&A as per Mint, a local newspaper, Blackstone might be interested. The promoters otherwise could be looking to sell in part or full stake in other group companies, as Reorg reported. It is also likely, as per Reorg, that the promoters could bring in equity infusion or issue additional preferential securities to FCPL.
Like many other retailers, the issuer is going through acute disruption in its business operations since March 24. In its call with USD bondholders and rating agencies on March 10, FRL highlighted that demand for non-discretionary goods remained inelastic irrespective of the macroeconomic situation. Later, however, in its communication to the stock exchange on March 22, FRL intimated the regulator of severe disruption in business.
Source: USD Bondholder and Rating Agency call on March 10.
Following the call, both S&P and Fitch downgraded the issuer. S&P downgraded FRL to B- from BB- on March 27 citing reasons of operational uncertainties, heightened liquidity risk, and weak financials. Fitch downgraded the issuer to B- from BB on April 4 citing similar reasons. The current rating stands at CCC- by S&P and CCC+ by Fitch.
A snapshot of rating history of the life of $500 million 5.6% Senior Secured due January 2025 bond is shown below.
Click HERE to enlarge
Despite management’s efforts, after the call, FRL’s bond price declined from 75 (or indicative mid yield 12.321%) on March 9 to 26.878 (indicative mid yield 42.991%) on May 5 (when Fitch downgraded the issuer to CCC+). As noted above, the 2025 bonds were last indicated at 45.36 on June 5 according to buy-side sources.
Impending Coupon Payments
Offshore bondholders’ reaction could be driven by the perceived risk of a non-payment of the upcoming coupon due on July 22 because of almost non existent cash inflow from business and a low cash available at hand during this pandemic period. The coupon payment due on June 3 also concerns onshore NCD holders as the payment of annual coupons of INR 211.935 million on two outstanding NCDs has been deferred as the company cited disruption in regular cash flows and working capital, per filing with the exchange on June 3. FRL intends to pay them over two months in tranches. The total cash outflow (in dollar terms) on offshore and onshore coupons, combined, are estimated to be $16.8 million against a cash balance of $21 million as of Sept. 30, 2019, however the latter has likely changed significantly to date.
The coupon amounts (in million) due in June and July on FRL’s outstanding USD bond and INR onshore bonds are as follows:
Click HERE to enlarge
Source: CBonds
Source: CBonds
Offshore Notes
The cross default provision in the offshore notes includes a $15 million threshold applicable to the principal of other FRL (or restricted subsidiary) indebtedness and does not include a trigger for the non-payment of interest/coupons, only the non-payment of principal payments and an acceleration of the debt prior to its stated maturity. The principal under each NCD, which is issued by FRL, is approximately $13 million -- therefore the NCDs are unlikely to fall within the offshore notes cross default trigger as they do not meet the debt threshold.
However, should FRL fail to make the coupon payments under the NCDs, and if after being accelerated, holders of the NCDs start involuntary proceedings against FRL (or a restricted subsidiary) i.e. seeking the appointment of a receiver, trustee and such appointment remains undismissed and unstayed for 60 consecutive days or any similar voluntary action by FRL (or a restricted subsidiary) is taken to, then this would trigger an event of default under the offshore notes -- which applies an automatic acceleration provision.
In terms of FRL’s ability to raise cash via asset sales, the offshore notes contain an asset sale provision which applies to FRL and the restricted subsidiaries. The provision sets out that asset sales are permitted as long as there is no default, consideration received is fair market value and is at least 75% is in cash or temporary cash investments, or replacement assets -- the latter weakens the protection.
In addition, if the asset sale involves FRL or the restricted subsidiaries selling or disposing of all or substantially all of the capital stock of any restricted subsidiary or all or substantially all of the assets that constitute a division or line of business of FRL or any restricted subsidiary must have been able to incur $1 of indebtedness under the ratio debt basket or would have a consolidated leverage ratio equal to or lower than the actual consolidated leverage ratio immediately prior to such asset disposition.
There is no requirement to provide holders with a fairness opinion if FRL receives a replacement asset involving aggregate consideration in excess of a certain dollar threshold.
Net proceeds from an asset sale can be applied by FRL or a restricted to:
- repay their senior indebtedness;
- make capital expenditures for the permitted business;
- acquire properties and assets to be used in the permitted business.
Onshore NCDs
The cross default provisions of the onshore NCDs due 2022 and 2023s detailed in the offering circular are applicable to indebtedness of any entity controlled by promoter controlled Future Corporate Resources Private Limited, Future Enterprises Limited, FRL, subsidiaries of FEL and Future Corporate Resources Private Limited.
Therefore it has a broader application than the cross default provision under the offshore notes and it catches indebtedness under the offshore notes issued by FRL. The NCDs cross default provision does not include an indebtedness threshold.
Any non-payment of the coupon under the FRL issued offshore notes would likely trigger the cross default provision detailed in the NCDs, as ‘interest payments’ may constitute “Financial Indebtedness” as defined in the NCD certificate.
However, the cross default provision applies a 60 a day cure period to non-payment of interest/coupons -- which is likely to be in addition to the 30 day grace period under the offshore notes that is applicable to coupon payments.
As mentioned above, FRL has deferred annual coupon payments on two outstanding NCDs over a period of two months.
Like the offshore notes, the NCDs also include event of default provisions which would be triggered if corporate insolvency resolution process (CIRP) or liquidation proceedings are started against FRL, subject to no event of default being triggered if the CIRP are started by a financial creditor and discharged within 5 days or an operational creditor and discharged within 15 days of the date of the insolvency application being filed.
In addition, an event of default will be also be triggered if a suspension of payments, moratorium - by way of voluntary arrangement such as a scheme of arrangement - or a compromise, arrangement with a creditor occurs, or the enforcement of security takes place or the appointment of liquidator, receiver or administrator is made -- the provision states that no event of default will be triggered if the insolvency appointment is dismissed within 60 days.
Unlike the offshore notes, the NCDs do not provide an automatic acceleration trigger for the ‘insolvency’ related event of default provisions. Acceleration of the NCDs requires majority holder consent -- 51% of the nominal amount of debentures then outstanding.
A further event of default may be triggered under the NCDs if a change of control is triggered and it results in Future Corporate Resources Private Limited ceasing to (i) own, directly or indirectly, 26% of the issued and paid up equity shares of FRL, (ii) have the ability to appoint majority of the board of directors of FRL, (iii) have the power to direct the management and policies of FRL and (iv) have the power to control and direct the business, operations and functioning of FRL.
For completeness, the onshore NCDs do not include a grace period for the non-payment of interest (but do allow a one day grace period for defaults due to technical error). The NCDs include a 2% default interest step up mechanism which applies to both delays with principal redemption and interest payments.
Current NCD Defaults, Bombay Court Proceedings
The Future Retail Group has defaulted on its INR 3.2 billion NCDs. They were issued by Rural Fairprice Wholesale Limited under a trust deed dated Jan. 12, 2018 and INR 6 billion NCDs issued - via two series - by Future Corporate Resources Limited under a trust deed dated April 10, 2019.
The default was triggered because the mark to market losses were not covered under the minimum security coverage mechanics -- which requires the company to maintain a certain loan to value ratio with either a cash or share top up required if the underlying value of the pledged shares falls.
Per the trust deed the share price was INR 350 per share when the deed was executed between a promoter company (Rural Fairprice) and IDBI Trustee. Due to COVID-19, the share price declined 76.4% to 80.6 on May 8, creating a mark to market losses of INR 4.796 billion (Reorg estimates). As such the promoter had to supply with cash or additional security to keep the coverage at 2.5x. Future Retail traded at INR 98.2 per share (BSE) on June 5.
On March 20, IDBI Trusteeship Services, the NCD security trustee of Future Corporate Resources and Rural Fairprice Wholesale, invoked the pledge held over 8% of the shares of FRL, due to the occurrence of an event of default, as reported. This is another aspect which Fitch considered before downgrading the issuer to B- as per the April 2 report (current FRL Fitch rating at CCC+).
Shortly after the event of default under the NCDs and an attempted enforcement of the share pledges, Rural Fairprice and Future Corporate Resources filed an ad-interim prayer in the Bombay High court seeking an injunction to block the sale of pledged FRL shares by IDBI Trusteeship Services Ltd. -- which the Bombay court granted on March 30.
The Bombay High Court suggested Rural Fairprice Wholesale Ltd. to consider providing additional security to its debenture holders. Despite the Future Retail group making a proposal to offer a charge on an immovable property as additional security, UBS AG stated that the proposed additional security is not “commercially viable,” according to a May 15 order by the Bombay High Court. The Bombay court is hearing arguments on whether the stay on enforcing the share security should continue.
Given that the issuers under the defaulted NCDs are Rural Fairprice Wholesale Limited and Future Corporate Resources Limited - subsidiaries of promoter controlled Future Corporate Resources Private Limited - a default under the NCDs may have triggered a cross default under the NCDs due 2022 and 2023 (see application of cross default provision detailed above) -- as ‘debentures’ look to fall within the definition of “Financial Indebtedness” as defined in the NCD certificate and the provision catches both a non-payment or acceleration prior to maturity as a result of an event of default of the underlying indebtedness.
As detailed above, the cross default provision under the NCDs applies a 60 a day cure period to a non-payment, which would have already expired based on the share pledges being invoked on March 20 -- if the debt under the debenture trust deeds is accelerated prior to their maturity, no such cure period applies.
Even with the possible cross default under the due 2022 and 2023 NCDs, creditors may be refraining from acting, given the ongoing proceedings in the Bombay court and combined with Franklin Templeton Mutual Fund’s decision on April 29 to - in accordance with RBI policy which has provided a moratorium on ‘term loan’ repayments until May 31 and which has since be extended to August 31 - grant a moratorium to three Future Group entities in relation to their NCDs obligations which were falling due.
It may be the case that Future Retail group creditors, including those under the due 2022 and 2023 NCDs, may now be waiting to see the outcome of the Bombay court proceedings before taking further action even if cross defaults have occurred -- due to the uncertainty surrounding potential security enforcement and whether any action can be taken given the RBI moratorium, should the NCDs fall within the definition of ‘term loans’.
For completeness, as the cross default provision under the offshore notes only applies to FRL and its subsidiaries, a default under the debenture trust deeds of the NCDs is therefore unlikely to trigger it.
Increased Leverage
Furthermore, since the end of the previous financial year until March 10, the issuer’s debt load has gone up two-fold. FRL ’s proforma gross debt has increased by 2.22x to $864 million as on March 10, 2020, from $388.4 million for the period ended March 31, 2019. However, the EBITDA for nine month ended Dec. 31, 2019 doubled to INR 20.45 billion as compared to full year 2019 EBITDA of INR 10.6 billion, per Reorg estimates. The bump in EBITDA is due to change in Indian Accounting Standard AS-116, which added INR 5.841 billion in the first two quarters of FY20. Unadjusted nine month EBITDA as per company presentation is INR 9.089 billion for period ended Dec. 31, 2019.
The historical leverage profile of Future Retail as of Dec. 31 is shown below.
Impact of change in accounting standard AS116 is HERE.
Unrestricted cash stood at $385.6 million as of March 10 (pro-forma) according to Reorg estimates. Furthermore, sources have confirmed that the banks have granted at least 15% (or INR 6.5 billion) additional ad-hoc peak festive season working capital limit, as reported.
The issuer’s standalone Pro-forma Capital Structure as of March 10 is shown below:
Click HERE to enlarge
The gross debt figure is adjusted for payment of INR 15 billion made towards FRL’s working capital loans, as stated in the March 10 investor presentation. The money received came by way of equity infusion of INR 15 billion from FCPL. As per the same presentation, the amount paid could be remainder payment towards conversion of 24.8 million equity share warrants (out of 39.6 million) issued by FRL in 2019. According to the latest filing by the company with the exchange, the warrants stand fully converted. Post conversion the equity share base has increased to 542.2 million shares as of March 31 from 502.59 million on Dec. 31, 2019.
On the same call with bondholders and rating agencies, the company disclosed that it paid INR 35.6 billion towards ‘target asset acquisition’, the core reason for raising $500 million offshore in Jan 2020 as defined under ‘Use of Proceeds’ in $bond OC.
The target asset purchase as defined in OC was a purchase from FEL of in-store retail infrastructure assets such as furniture, fixtures, fittings, electric equipment, and IT infrastructure required for retail outlets.
FRL had given corporate guarantees to another group company, Future Enterprises Limited (FEL), for various borrowings undertaken by FEL. After extinguishing such cross guarantees, FRL would be saving nearly INR 6.5 billion per management guidance. It would also de-risk the company from cross-default in future; it can record assets in its books, reduce lease expenses, and charge depreciation.
Corporate Guarantees By FRL
As per FEL’s annual report FY2019 disclosures, the total value of cross guarantees stood at INR 35.826 billion as shown below.
Click HERE to enlarge
Source: Future Enterprises Ltd, AR 2019
Source: Future Enterprises Ltd, AR 2019
Fitch in its report dated April 2, stated the following rationale for the downgrade.
- “Yet to be restructured FRL entity’ where the issuer buys target asset from FEL in timely manner to remove cross guarantees and to ensure the terms of the $bond is met
- Heightened risk to liquidity and
- Need for promoters to reduce share pledge and ‘restore’ financial flexibility at FCRPL.
When the US dollar bond was issued, it was unsecured and was supposed to be collateralized within 150 days after the original date of the bond issuance i.e. Jan. 22, 2020.
Source: $bond OC Jan, 2020
Note - s.a: semi-annual, Optional redemption: on or after xx date
Note - s.a: semi-annual, Optional redemption: on or after xx date
Reorg estimates that documentation for creating a charge on the assets could be completed by June 19, which is the deadline for terms and conditions of the bond issue implementation. Two private law firm sources have indicated that registration and notary work are ongoing despite the lockdown.
Business Operations, Liquidity and Cash Burn
As noted above, the company’s operations are severely hampered during the lockdown period. The Indian government only allows the sale of essential items such as food and groceries. Malls, shopping complexes and market areas remain shut and standalone stores dealing in food and groceries remain open.
FRL has large format stores located in malls, shopping complexes and market areas. Another sister brand, Easyday, a miniformat retailing brand of FRL (or also known as ‘neighbourhood store’) dealing in daily essential supplies were in operation.
Should the lockdown be lifted before June 30, cash flow that could be generated by the end of July. We assume that revenue contribution from food sales remains 33%, which is consistent with the ratio of food sales to non-food sales of 33:67 for two consecutive financial years and nine month ended Dec. 31, 2019.
We also assume at least 75% of the FY19 footfalls would return in July and revenue per footfall returns to pre-lockdown levels of INR 575.1 per footfall. It's also possible, and in our assumptions, that FRL will apply for RBI- sanctioned moratorium (COVID19 related relief) available till August 31 on payments of interest and principal.
The assumptions are as follows:
Based on the assumptions above, Reorg estimates Future Retail’s losses before taxes ranging from negative INR 5.6 billion to negative INR 800 million, between April to July, depending on either our bear or base case.
If FRL witnesses the return of footfalls to at least 75% of FY19 level by July, Reorg estimates that FRL can generate positive EBITDA of INR 287.8 million. Estimating for depreciation and amortisation and bond coupon outflow through July, there would be a loss of nearly INR 818.7 million, which is significantly lower when compared with a lower footfall or lockdown scenario.
An illustration of COVID impact on revenues and cash flows (not adjusted for inflation) is shown below.
The sensitivity analysis below shows EBT variability with increase or decrease in footfalls - split into monthly run rate - at 75% of FY2019 footfalls.
Any footfall less than 75% of FY19 actual footfall could widen operating losses given the absence of cash flow and thus constrained liquidity.
We haven’t assumed any deferral on the rent / lease payment in the calculations above. However, one source commented to Reorg that FRL could be talking to the lessors for forbearance on rental/lease payments.
In such a scenario, considering a 100% forbearance on rentals/ lease payments, the EBITDA would expand to INR 985.6 million from INR 287.8 million and therefore FRL would see a relatively lower amount of losses before taxes i.e.INR 121 million instead of loss of INR 818 million at 75% of FY2019 footfalls in the month of July post coupon payment .
Impact at Earnings before taxes level (in case of forbearance of rents/leases payments):
Working capital requirements during these four months (April to July) could come from existing revolver facilities tied up with the banks. According to company’s disclosures in the US dollar bond OC, the issuer has consortium agreement dated Aug. 23, 2017 with the banks for INR 57.5 billion, known as ‘Working Capital Facility’, which can be tapped as and when required. As per the pro-forma liquidity, unrestricted cash available with the issuer is estimated to be $385.6 million. Also, as mentioned above, the company has been granted 15% of ad-hoc working capital facility by the banks. Store operations could run smoothly with this facility. We have also considered reduced lease payments as FEL cross guarantees have been paid off, as per the management.
The standalone financial summary of FRL for the period ended Dec. 31, 2019 is shown below.
Corporate Structure
Future Retail Limited (FRL) is owned and managed by Kishore Biyani who is also the Chairman and Managing Director of the company and by his cousin, Rakesh Biyani, Jt Managing Director in the company. Kishore Biyani is a first-generation entrepreneur and considered to have pioneered modern retailing in India.
Kishore Biyani is also a founder of Future Group. Future Group is one of the leading players in Indian consumer products and retail industry with a prominent presence across food, FMCG, apparel, logistics, and financial services.
FRL is a leading retailing business in India with 1,550 stores, 12.8 million square feet of retail space, and a revenue of over INR 201 billion as of Jan. 4, 2020. It has successfully implemented a multi-format retail strategy across large and small format stores that captures
a wide consumer base, which is categorized into (i) hypermarkets, supermarkets, and convenience stores, (ii) value fashion, and (iii) consumer durables and electronics. It operates its hypermarket chain under the name of Big Bazaar.
As of Jan. 4, 2020, FRL is organized as follows:
Click HERE to enlarge
As per the shareholding summary available for fiscal ended March 31, the promoter group companies, Future Corporate Resources (FCRPL) and Future Coupons Private Ltd (FCPL), own 31.89% and 9.82% stake in Future Retail respectively on fully diluted basis i.e. post equity warrants conversion. The structure is in line as proposed under US dollar bond issuance.
Click HERE to enlarge
Source: BSE India
Source: BSE India
Pledged shares of Future Retail, at the promoter level, have gone up to 74.9% for the year ended March 31 from 57.77% as of Dec. 31, 2019. Of which, FCRPL now holds 31.89% (down from 44.28% in the previous quarter) and 98.02% of its shares in FRL are pledged.
The remaining 59.69% shares are held by the public as of March 31.
Share warrants to promoters
FRL was issued 39.60 million equity warrants to the promoter group entity, Future Coupons Private Limited (FCPL), on April 23, 2019, according to USD bond OC due 2025. Total consideration of warrants was INR 20 billion and to be exercised 18 months from the date of allotment (i.e. on or before Oct. 22, 2020). The company received 25% of the warrant issuer price of INR 5 billion initially. The issue price of the equity warrants was INR 505 per warrant.
As per the latest information filed with exchange by FRL, the warrants have been fully converted and the remaining INR15 billion has been fully paid off.
The warrants that FCPL holds would convert into 7.3% of the paid-up equity share capital of the company on a fully diluted basis i.e. post-conversion of warrants.
New funding and RBI Measures
Future Retail and its promoters have been raising new funding. On May 29, FRL issued senior secured NCD due June ‘23 to raise INR 2 billion with annual coupon of 9.95%. The new issuance was subscribed by Union Bank of India, which rolled over its debt as NCD. The board of FRL has already approved the resolution to raise up to INR 6.5 billion funding via secured/ unsecured redeemable non-convertible debentures on private placement basis, as reported.
The INR 2 billion NCDs were likely subscribed by a state-run bank under INR 500 billion targeted long term repo operations 2.0 (TLTRO), announced by the Reserve Bank of India on April 17, to channel liquidity to small and mid-sized corporates, including non-banking financial companies (NBFCs) and micro finance institutions (MFIs), that have been impacted by COVID-19.
Under TLTRO, banks raise money from RBI at a repo rate of 4% and use the proceeds to invest in investment grade bonds, commercial paper (CPs) and non-convertible debentures (NCDs) of these corporates, according to RBI guidelines. The securities bought under TLTRO have to be held to maturity (HTM) in books of the banks, the guidelines added.
Furthermore, the Future Group is also looking to sell its logistics business. Another group company, Future Consumer, is planning to raise INR 3 billion in capital via rights issue, as reported by Reorg.
EY India is working with Future Retail to assess its working capital requirements, while Arpwood Capital is advising the promoters on an equity stake sale, as reported.
Conclusion
Distressed investors will be keenly watching for a timely coupon payment of USD bond on July 22, re-start of normal business operations, reduction in share pledge by promoters, and avoidance of Event of Default situations. Another important event likely to be watched closely would be covenant testing on Sept. 30, 2020.
Going forward, investors would likely hope to see a simplified group structure with no or less cross guarantees.
-- Manish Kumar, Jeff Burton
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