FUTURE RETAIL LIMITED
Fitch Ratings has downgraded Indian retailer
We have affirmed the long-term rating for the senior secured notes at 'C' and revised the Recovery Rating to 'RR6' from 'RR5'. All ratings have subsequently been withdrawn.
The 'D' IDR reflects Fitch's view that bankruptcy proceedings against FRL have started following a court order on
Fitch has chosen to withdraw FRL's ratings for commercial reasons.
Key Rating Drivers
Start of Insolvency Proceedings: The court order follows FRL's failure to meet more than INR100 billion in obligations since
Persistent Losses; Reduced Scale: FRL's default comes after sustained operating losses since the financial year ended
ESG - Management Strategy: Persistently weak profitability since the onset of the Covid-19 pandemic and litigation have curtailed management's efforts to support FRL's liquidity and financial flexibility, leading to the default. Suspension of FRL's board after the start of bankruptcy proceedings could lead to further operational challenges. This has a negative impact on the credit profile and is highly relevant to the rating.
ESG - Governance: The Biyani family pursued growth investment at its operating companies, such as FRL, rather than limiting leverage and preserving balance-sheet flexibility at the holding company. This is evident from a significant reduction in the stake of FRL's main shareholder,
Derivation Summary
FRL's 'D' rating reflects the initiation of bankruptcy proceedings against the company.
Key Assumptions
Recovery Analysis Assumptions
Fitch's recovery analysis assumes that FRL would be considered a going-concern in bankruptcy and would be reorganised rather than liquidated. We assume a 10% administrative claim.
The going-concern value is based on a going-concern EBITDA of INR3.1 billion and a 4.0x multiple.
The going-concern EBITDA assumption is about 70% lower than the INR10.4 billion EBITDA generated in FY19, the last financial year prior to the impact of the pandemic. Our lower EBITDA assumption underscores a deterioration in FRL's market position following a significant number of store closures. The going-concern estimate is higher than the actual performance since FY21, with FRL reporting persistent losses due to the impact of the pandemic and poor liquidity. This reflects our view that FRL's business model remains redeemable after the restructuring.
The 4.0x multiple is lower than the 5.5x median multiple for retail going-concern reorganisations to reflect FRL's mid-tier market position in
We used FRL's post-OTR debt structure, which includes accrued liabilities. Secured working capital and secured US dollar notes account for the majority of FRL's debt. We assume that available but undrawn lines, if any, will be fully drawn.
The recovery waterfall results in a recovery-rate estimate corresponding to a 'RR6' Recovery Rating for the
RATING SENSITIVITIES
Rating sensitivities are no longer applicable given the rating withdrawal.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
FRL has an ESG Relevance Score of '5' for Management Strategy, which reflects the limitations on management's ability to implement its strategy amid poor liquidity and bankruptcy proceedings. This has a negative impact on the credit profile and is highly relevant to the rating.
FRL has an ESG Relevance Score of '5' for Governance Structure due to the shareholding concentration and presence of highly leveraged related parties. This has a negative impact on the credit profile and is highly relevant to the rating.
FRL has an ESG Relevance Score of '4' for Social Impact, reflecting the risk to its business from a shift by consumers towards online shopping. This has a negative impact on the credit profile and is relevant in the rating in conjunction with other factors.
FRL has an ESG Relevance Score of '4' for Financial Transparency, reflecting limited disclosure and delays. This has a negative impact on the credit profile and is relevant in the rating in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
Following the withdrawal of FRL's ratings, Fitch will no longer provide the associated ESG Relevance Scores.
RATING ACTIONS
Entity / Debt
Rating
Recovery
Prior
LT IDR
D
Downgrade
RD
LT IDR
WD
Withdrawn
D
senior secured
LT
C
Affirmed
RR6
C
senior secured
LT
WD
Withdrawn
C
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VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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