Future Retail Preliminary Rating Lowered To 'B-' Amid Heightened Liquidity Risk; Ratings Placed On Watch Negative

  • Future Retail could face tighter access to funding and liquidity issues due to the challenges involving its promoter shareholding companies.
  • Moreover, there are operational uncertainties over the next 12 months due to COVID-19 containment measures and over the longer term due to the company's recent announcement of a change in business strategy.
  • On March 25, 2020, S&P Global Ratings lowered its preliminary long-term issuer credit rating on Future Retail and the preliminary long-term issue rating on the company's US$500 million senior secured notes to 'B-' from 'BB-'. At the same time, we placed the ratings on the Indian retailer on CreditWatch with negative implications.
  • The CreditWatch placement reflects growing risks around Future Retail's liquidity position, its access to banking and capital markets, ability to roll over credit lines following the credit-negative development at its promoter group level, and likely persisting event risk over the next few weeks amid a probable weakening operating performance.
SINGAPORE (S&P Global Ratings) March 25, 2020—S&P Global Ratings today took the rating actions listed above.
We lowered the ratings on Future Retail Ltd. because we believe the company's financial flexibility has weakened. In our view, the company's creditworthiness is undermined by the growing risks around the financial position of its promoter holding companies.
In January 2020, we highlighted that credit-negative developments at other Future Group entities may cause us to lower our credit assessment of the group and that if liquidity support from Indian banks to the company wanes we may assess Future Retail's liquidity as weak.
In our view, Future Retail is now exposed to a higher event risk triggered by a potential change-of-control covenant for its US$500 million secured notes issuance. The covenant requires the company's promoter shareholders--Future Corporate Resources Pvt. Ltd. (FCRPL) and Future Coupons Pvt. Ltd.--to maintain a 26% ownership in Future Retail. As of March 24, 2020, certain lenders have invoked the pledge on encumbered shares (8% of total shares).
We believe the flexibility available to FCRPL is now materially lower as Future Retail's market capitalization (against which the promoter shareholder has raised loans) continues to erode. FCRPL has significantly increased its share encumbrances to almost 84% of its shareholding (as of March 17, 2020) as against 58% at the start of March 2020. This is contrary to our earlier expectations, on which we assigned the preliminary 'BB-' rating. FCRPL owns about 41.1% of Future Retail.
The promoter shareholders' financial position could affect Future Retail's banking relationships--a factor we consider crucial for the company's ability to roll over its sizable short-term working capital loans. At the same time, the weak sentiment in credit markets restricts the company's access to alternate sources of financing, should liquidity pressure build up.
The high leverage and limited visibility on liquidity sources at the promoter shareholder level are likely to affect the standing of Future Retail in funding markets. Debt resolution at the promoter company (e.g. through potential restructuring) could also weigh on the group's reputation. We believe these recent developments could suggest a greater degree of linkage between the promoter shareholder and Future Retail going forward.
Given its unlisted status, limited disclosures at FCRPL is a weakness from a credit perspective. We believe the financial stress at the promoter holding companies indicates the need for better risk management practices at the group.
We expect Future Retail's management to adhere to its commitment on no outsized distributions to promoter shareholders, even though risks of some dividend payments have increased, in our view. Our previous rating assumed no shareholder distributions in fiscals 2020 and 2021 (year ending March 31). We believe FCRPL has access to other sources of cash flow such as monetization of non-core assets for meeting its debt-servicing requirements. However, the illiquid nature of such assets could make these sources of financing unviable for short-term funding requirements, especially in the current market environment. This is also reflected in the sudden spike in share encumbrances by the promoter shareholder.
The CreditWatch placement also reflects likely weaker operating cash flow for Future Retail in fiscal 2021 as the COVID-19 pandemic develops in India, the company's only operating market. The anticipated slowdown in the economy, lower discretionary spending, and operational disruptions (due to closure of malls) are likely to affect the company's operating cash flow over the next 12 months. Moreover, the recent change in business strategy could lead to lower margins than we earlier expected. Weaker operating conditions could also lead to higher working capital demand, although the company is in discussions with its bankers to enhance its credit lines.
The CreditWatch placement reflects growing risks on Future Retail's liquidity position, its access to banking and capital markets, and ability to roll over credit lines following the credit-negative development at the group level. In addition, the event risk is likely to persist over the next few weeks amid a probable weakening operating performance.
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