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No haircuts in store for FRL lenders in Future Group-RIL deal
Asset Disposals
Image source: Redd Intelligence

Strategic Considerations: As Future Group gears up to finalise the sale of its retail businesses to Mukesh Ambani owned Reliance Industries (RIL) tomorrow, with the latter taking over the entire debt involved, banks have ruled out any need for a debt restructuring of Future Retail—an operating firm of Future Group. RIL will take over the assets in an all-cash transaction and plans to pay around INR 130bn (USD 1.75bn), offering zero haircut to banks after acquiring the retail assets, which will first be merged into Future Enterprises, another group company comprising the backend infrastructure. The group firms including Future Retail had been facing a cash crisis since March, after its operations were disrupted due to the pandemic. As part of the deal, RIL will be picking up Future Retail, Future Lifestyle Fashions, Future Consumer and Future Supply Chain, which will be merged into FEL before being sold. RIL will also be paying around INR 60bn (USD 811m) to lenders including UBS AG at the holdco. The deal will be finalised during the Future Enterprises board meeting on 29 August. As part of deal negotiations, a Future group company will continue to supply food and fashion to the merged entity.

  • Future Retail reported INR 46.44bn (USD 630m) in total borrowings as of 30 September 2019 
  • Total founder group debt was INR 119.7bn (USD 1.62bn) as of 31 March 2019, according to REDD estimates
  • RIL will also be paying vendors of Future Group around INR 70bn (USD 946m) 

Future Group is set to finalise the sale of its retail businesses including Future Retail Limited to Reliance Industries (RIL) in an all-cash deal, entailing a zero haircut for banks and bonds, three sources said. RIL will be paying around INR 130bn (USD 1.75bn at today's exchange rate) to the banks for acquiring the retail businesses including Future Retail, Future Lifestyle Fashions Limited, Future Consumer Limited and Future Supply Chain Limited, which will first be merged into Future Enterprises Limited (FEL), the firm comprising backend infrastructure, before being sold to RIL.

The deal involves a zero haircut for banks and bonds, thus saving the group companies the pain of undergoing debt restructuring, the first source said, adding that RIL wanted to avoid erosion in the value of assets due to delays arising out of the restructuring process.

Future Group is currently under moratorium, which was announced as part of the Reserve Bank of India’s Covid-19 relief package on 27 March. The moratorium applicable to loans taken from onshore banks and non-bank finance companies (NBFCs) ends on 31 August, post which the firms will have to start servicing the loans.

Since the closure of the deal may take a few weeks, it will be the responsibility of Future Group promoters to repay the debt, the second source said. It is expected that the group may raise some interim financing, backed by a letter of comfort provided by RIL, the source said. 

RIL will also pick up a minority stake of around 15% in FEL after acquiring the retail businesses from FEL, the second source said.  

An RIL spokesperson declined to comment on “market speculation.” A Future Group spokesperson did not respond to calls and messages. 

The deal is also expected to involve RIL shelling out around INR 60bn (USD 811m) to pay promoter debt at the holdco, a second source said. Another INR 70bn (USD 946m) will be paid for vendor liabilities, the source added.

The lenders at the holdco, including UBS AG, had turned the heat on the company in March, invoking the promoter pledge after the share price nose-dived due to the lockdown announced by the government to curb the pandemic, as reported. The invocation of the pledge, however, was challenged by Future Group in the Mumbai High Court on grounds that the firm should be entitled to some relief due to the business impact by Covid 19. The case is pending in the court.

Future Group companies have been adversely affected by the pandemic and have been grappling with a liquidity crisis since mid-March due to disruption of operations. Future Retail managed to prevent a default on 25 August after it mustered USD 14m last minute to pay the semi-annual coupon on its USD 500m 5.6% senior secured bonds, as reported. FEL has already defaulted on its non-convertible debentures due to non-payment of INR 126.5m (USD 1.7m) interest, as reported. 

Total founder group debt was INR 119.7bn (USD 1.62bn) as of 31 March 2019, according to REDD estimates. Future Retail reported INR 46.44bn (USD 630m) in total borrowings as of 30 September 2019, compared with INR 26.91bn (USD 364.8m) in March 2019. Future Lifestyle Fashion reported INR 9.025bn (USD 122.38m) in total borrowings as of March 2020.

Future Group’s insurance businesses, Future Generali India Insurance and Future Generali Life Insurance, are being sold separately, where FEL owns 49.91% and 33.03% stakes respectively. Citibank and UBS AG are running mandates for the sale of Future’s stake in these two businesses. 

As per the larger deal detail, a Future group company will be selling food and fashion products to the merged entity of Future and Reliance Retail. With the deal, Reliance Retail will acquire brands like Big Basket, Food Bazar, Food Hall and Brand Factory.

Kishore Biyani will be left with listed companies including Galaxy Cloud Kitchens and unlisted companies including Future Media Limited, Futurebazaar India Limited, Future Merchandising and Sourcing Pte, a third source said. 

FEL's board, which was supposed to meet on 22 August, postponed the meeting by a week, as reported. Future Retail's USD 500m 5.6% bonds due in 2025 were indicated at 67.25 bid as of Friday afternoon.

by Malvika Joshi and Shilpy Sinha 

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