S&P Lowers Future Retail's Issuer Credit Rating From 'B-' To 'CCC-'

Rating agency Standard & Poor’s has lowered Future Retail Ltd’s long-term issuer credit rating from 'B-' to 'CCC-' as its liquidity position has weakened by the extended lockdown in India due to COVID-19.

The ratings remain on CreditWatch with negative implications to reflect the company's weakening debt-servicing ability. Future Retail or its related entities are likely to restructure its debt within the next few months. Its operating cash flows are likely to remain weak over the next two months.

The ratings on Future Retail remain preliminary because the cross-guarantees between Future Retail and group company Future Enterprises Ltd have not been fully released, S&P said in a statement.

The India-based retailer's ability to meet its upcoming financial obligations is dependent on an improvement in business conditions or access to additional lines of credit. “We anticipate a phased relaxation of the lockdown across India after the government's deadline of May 3. This could mean a gradual recovery in revenue”, S&P said.

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However, the discretionary spending will remain low, given the expected decline in disposable income due to the economic impact of COVID-19.

Sales in high-margin segments such as fashion, accounting for about one-third of the company's revenue, are unlikely to pick up until later in the year. “We believe Future Retail's available cash and cash equivalents have fallen from Rs 200 crore as of Dec. 31, 2019”, it said.

Future Retail's disbursement of approved credit lines from banks has been further delayed. This includes enhanced working capital credit lines of about Rs 2,125 crore which were expected to be available in April 2020. In addition, the company is proposing to avail its Rs 650 crore peak-season working capital credit line to support its liquidity.

The delays in disbursement are due to procedural issues during the lockdown and the company now expects them to be available by May 2020. “We expect these credit lines to be sufficient to meet the company's immediate funding requirements, should they become available. Timeliness remains critical”, S&P said.

Potential debt restructuring at the operating and promoter group level remains an overarching credit risk. The restructuring of onshore debt at Future Retail or other related entities could trigger a cross-default on the company's $ 500 million senior secured notes.

Additionally, the restructuring of promoter debt could trigger the change-of-control clause on the company's senior secured notes, through the promoter shareholding potentially falling below 26 per cent in such a scenario.

Future Retail is India's leading retailer. It is listed on Indian stock exchanges and is about 40 epr cent-owned by promoter shareholders as of March 31, 2020. The company sells primarily food, grocery, home and personal care products, and general merchandise via Big Bazaar and Easyday/Heritage Fresh convenience stores, and fashion goods via its Fashion at Big Bazaar format.