S&P may downgrade Future Retail to default

Cites liquidity pressure, depressed operating cash flow, delays in disbursement of credit lines from banks

S&P Global Ratings on Wednesday warned that it would downgrade Future Retail to default category due to liquidity pressure faced by the company, depressed operating cash flow and delays in disbursement of credit lines from banks.

S&P Global Ratings warned on Wednesday that it would downgrade Future Retail to default category because the company faced liquidity pressure, depressed operating cash flow and delays in disbursement of credit lines from banks.

This comes at a time when Reliance Industries is in talks to acquire majority stake in Future Retail, after the company’s lenders approached the Ambanicontrolled company for an acquisition.

S&P said Future Retail failed to make a coupon payment of about ~100 crore for its $500-million senior secured notes due on Wednesday. Technically, a payment default has not yet occurred under the indenture governing the notes, which provides a 30-day grace period, the rating firm said.

“However, we could lower our preliminary rating on Future Retail to ‘D’ if we feel the company is unlikely to meet its commitment within this grace period. Even if Future Retail makes the coupon payment within the grace period, its weak liquidity will remain an overarching credit risk,” it said.

The company has indicated to the rating firm that it would make the coupon payment within the grace period by improving operating cash flow through bank funding, or arranging for alternative sources of funding, including the sale of certain assets.

The firm also expects its liquidity to improve with a potential equity recapitalisation, which could bring in a strategic investor. “However, our rating does not factor in such transactions because of limited clarity at this time,” said the rating firm.

The rating is preliminary due to the cross-guarantees between Future Retail and its group firm, Future Enterprises, have not been fully released, with about 20 per cent still pending.

“... We could lower our preliminary rating on Future Retail to ‘D’ if we feel the company is unlikely to meet its commitment within this grace period. Even if Future Retail makes the coupon payment within the grace period, its weak liquidity will remain an overarching credit risk”

— S&P GLOBAL RATINGS