Deal With Reliance Retail In Limbo, Future Group Lenders Mull Insolvency Filing
As its deal with Reliance Retail faces further delays, could Future Group entities be staring at insolvency?
As a proposed deal between Reliance Industries Ltd. and Kishore Biyani's Future Group remains entangled in legal hurdles, lenders are beginning to discuss whether the company will need to be referred to insolvency resolution. More so as several Future Group entities continue to face severe operational and financial difficulties.
According to three people in the know, if the sale of Future Group's retail assets to Mukesh Ambani-led Reliance Retail Ventures Ltd., announced in August 2020, is not concluded by December 2021, the lenders will be forced to consider an insolvency filing.
As part of the one-time restructuring scheme approved by lenders in April, Future Group companies are required to make their first bullet repayments in December. If the transaction with Reliance gets delayed beyond December, Future Group may not be able to make these repayments. In such a scenario, the restructuring scheme would be null and void.
Lenders may then have to file an insolvency petition against the company in order to recover dues, the people quoted above said.
Every month of delay in implementing the deal adds about Rs 200 crore worth operational debt to Future Group's balance sheet, BloombergQuint had previously reported. This rising operational debt has left bankers worried about how much they will recover through the sale.
Last week the Supreme Court ruled as valid an emergency arbitral award in a challenge against the deal by Amazon Inc, an investor in some Future Group companies. The judgment may further delay the implementation of the sale.
The group's cumulative debt stands at around Rs 30,000 crore. Banks including State Bank of India, Bank of India, Bank of Baroda and Axis Bank have exposure to the group's firms.
Future Group declined to respond to queries, while queries sent to SBI on Monday remained unanswered.
While the insolvency resolution option is on the table, banks will be required to look at the IBC's history in resolving service sector companies, the first of the three people quoted above said. Future Group firms do not have many hard assets to sell, which may lead to large haircuts for the lenders.
Yet, an insolvency filing could protect Future Group entities against claims from bondholders and operational creditors, through a court-mandated moratorium on payments. Despite multiple meetings with Future Group officials, vendors have started to become impatient, the first of two people quoted above said.
Bankers are watching for Reliance Retail's response to the delay in closing the deal. As time goes by, the initial financial assessment by Reliance will need to be restated, which could mean that the approximately Rs 25,000 crore enterprise valuation for Future Group's retail assets may be revised downward, these people said.
The purpose of the transaction was that Reliance Retail would get access to Future Group's retail footprint across India, its in-house brands and loyal customer base, the second person quoted above said. However, the delays in the deal could reduce the lure of these factors.
Nearly all of Future Retail's stores are leased and could face shutdowns due to strained financials, the second person said. Customers in major cities and even in some tier-2 locations are also quickly moving to online shopping for groceries, which diminish the relevance of stores, he added. Apart from food products, Future Group's apparel and clothing stores are also struggling to keep the shutters open, which is impacting the value of the in-house brands.
To be sure, the deadline to conclude the deal has been extended from March 31 to September 30 already.
Even if Reliance Group remains committed, whether Future Group will "remain alive enough to see the end" is a matter of concern, the third person quoted above said.