Fitch Ratings on Monday said that high pledged promoter shareholding at Kishore Biyani-led Future Retail Ltd could trigger a “change of control" event for its dollar bond holders in the event of a default by the promoters.
“Fitch Ratings believes negative liens that restrict dividend payments to the owners of India-based Future Retail Ltd (FRL) 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 $500 million, 5.6% senior secured bond due 2025 in the event of default by the promoters," the agency said in a statement.
The retail chain operator had raised these bonds in January.
The funds were mobilized to finance the purchase of retail assets from a group company, Future Enterprises Ltd. On 12 October, FRL said it will acquire retail infrastructure assets of Future Enterprises in one or more tranches, through direct purchase, acquisition through slump sale or any other mode as mutually acceptable between the two firms. These retail assets were valued at around ₹4,000 crore.
Fitch said FRL had disclosed that the value of debt issued by the promoter group, which is encumbered by FRL shares, was ₹2,730 crore on 6 March 2020. This compares with its total shareholding value in FRL of ₹7,560 crore and represents an encumbrance of 31% of total shares, or 62% of the promoters’ 49.5% shareholding in the company, according to company calculations.
“...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, Inc. 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," Fitch said.
However, Fitch added that the bondholders could draw comfort from the promoters’ efforts to seek a reduction in encumbrance levels.
“The promoters have already lowered the level of FRL shares encumbered by debt, which stood at ₹2,920 crore 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 fall in FRL’s share price," it added.
The company said 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, Fitch noted.