Fitch Ratings: Promoter Debt at India's Future Retail Unlikely to Trigger Change of Control

(The following statement was released by the rating agency) Fitch Ratings-Sydney-March 16: Fitch Ratings believes negative liens that restrict dividend payments to the owners of India-based Future Retail Limited (NS:FURE) (FRL, BB(EXP)/Positive) protect bondholders, but that the encumbrance of part of the promoter's shareholding to secure debt taken out at the promoter level could trigger a change of control event on FRL's USD500 million 5.6% senior secured bond due 2025 in the event of default by the promoters. We also believe attempts to monetise assets over the previous few years within the promoter group and the implementation of maximum encumbrance targets on FRL shareholdings shows that the promoters intend to limit interdependency and risk. FRL disclosed that the value of debt issued by the promoter group, which is encumbered by FRL shares, was INR27.3 billion at 6 March 2020. This compares with its total shareholding value in FRL of INR75.6 billion and represents an encumbrance of 31% of total shares outstanding at FRL, or 62% of the promoters' 49.5% shareholding in the company, according to company calculations. The average length of maturity for the promoter loans encumbered by FRL shares is 2.7 years and a door-to-door maturity, which takes into account any period of moratorium, is 6.0 years Higher dividends or other capital stock payments to promoters to help with debt servicing, such that consolidated net leverage - defined as the restricted group's net debt/EBITDA - exceeds 3.5x would breach the company's incurrence test. Under this scenario, FRL would have sufficient liquidity to maintain its operation, especially in light of its aim of improving working-capital efficiency. Furthermore, it would be able to draw incremental debt under its working-capital facilities to the greater of either USD80 million or 2.5% of revenue, both of which equate to around INR6 billion; this compares with a drawn down amount of INR18 billion at 6 March 2020. An additional USD50 million would also be able to be drawn from general debt in this scenario. Alternatively, given the promoters have encumbered 31% of shares, this could trigger a change of control redemption on the bond should the promoters default on their debt and the lenders elect to call the encumbered shares. Bondholders could call the bond if permitted holders - primarily the promoters, Amazon.com (NASDAQ:AMZN), Inc. (A+/Positive) and related entities - hold less than 26% of the voting power in FRL and one or more rating agencies downgrade FRL's rating by at least one notch. The permitted holders' ownership in FRL would fall to around 20% if the lenders elected to call the encumbered shares, which is below the trigger level. Should FRL's ratings also be downgraded, the change of control provisions would be triggered, assuming there are no shareholding changes from current levels. We understand that the promoter group has been and continues to seek a reduction in encumbrance levels and is targeting a maximum of 65% of the value of the promoters' shareholdings being encumbered. The promoters have already lowered the level of FRL shares encumbered by debt, which stood at INR29.2 billion in September 2019, and total FRL shares encumbered by promoter group loans of 37% - or around 70% of the promoters' holdings - in November 2019. The promoters further lowered encumbrance levels in their holdings to around 50% in January 2020, but this has since risen to 62% due to falls in FRL's share price. The company has said that it will manage debt levels and has the ability to pledge other promoter group entity shares in lieu of FRL shares to secure debt to ensure its 65% maximum encumbrance will be met should the share price continue to fall. The promoter group has also monetised assets and reduced encumbered debt at the promoter level over the previous few years - again highlighting its commitment to managing debt and encumbrance of shares to manageable levels. These actions include the sale of a 26% stake in Future Group's joint venture with Generali (MI:GASI) Group for INR9.6 billion - where around INR3.2 billion is expected to be received over the next two years - its stake in a joint venture with Skechers for INR5.9 billion and around a combined 10% stake in fellow promoter group company, Future Lifestyle Fashions, to three separate parties for around INR10 billion. We understand that the promoters continue to explore other asset monetisation opportunities. Fitch also understands that the promoters have other loans outstanding that encumber shares in other group entities. However, management has stated that these encumbrances are distinct from FRL and that controls exist to ensure all related-party transactions are on a market basis, which will protect access to profits and cash for FRL shareholders and creditors. The loan counterparties have also shifted towards private equity - which now makes up around 80% of the loans - away from mutual funds and non-banking finance companies. This has lowered the number of shares that have been encumbered to securitise the loans, with the private equity loans requiring around 1.2x to 1.3x coverage, compared with 2.0x for the regulated funds. The non-banking financial companies, which fund 13% of the loans, are not likely to have been exposed to the recent issues seen in the sector. Our expected rating on FRL incorporates our belief that the cross-guarantee arrangements between FRL and Future Enterprises Limited (FEL) will cease, with the company targeting 31 March 2020. The group received approval on 87% of its total limit on FEL term loans and non-convertible debentures, 61% of its total limits on FEL working capital facilities and 76% of total limits on FRL working capital facilities at 6 March 2020. Remaining approvals are on track. We will look to convert the ratings from expected to final once the cross-guarantees are removed. Contact: Kelly Amato, CFA Director +61 2 8256 0348 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com; Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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