Future Group's Lenders: It's A Complete Mess

Future Group lenders are left with no option but to prepare for lower recoveries.

Kishore Biyani, chief executive officer of Future Group. (Photographer: Dhiraj Singh/Bloomberg)
Kishore Biyani, chief executive officer of Future Group. (Photographer: Dhiraj Singh/Bloomberg)

It's a complete mess—that's how one large lender to Future Group companies described the situation that banks find themselves in as a three-way battle between Kishore Biyani's companies, the Reliance Group and Amazon takes a new turn.

On March 9, Future Retail Ltd. informed exchanges that it had received termination notices from Mukesh Ambani's Reliance Group companies against 835 of its outlets. This includes 342 large format stores such as Big Bazaar and Fashion@Big Bazaar, as well as 493 small format stores such as Heritage and Easyday.

Separately, Future Lifestyle Fashions Ltd. also told the bourses that it had received termination notices against 34 "Central" stores and 78 "Brand Factory" stores, from Reliance Group.

"These stores have been historically contributing 55-65% of retail revenue operations of the company. As of now these stores are not operational for stock and inventory reconciliation," both companies said in their respective exchange statements.

The notices mean that Future Group can no longer generate business from these venues, even though both companies, in their statements, said they are in negotiations with Reliance Group to maintain status quo.

This turn of events has meant that lenders, with nearly Rs 30,000 crore in debt exposure to Future Group companies, have run out of options. The one-time restructuring has failed and a deal, which would have helped lenders recover their dues, remains mired in uncertainty. Banks are now resigned to the prospect of lower recoveries from these accounts, two bankers directly familiar with the account said on the condition of anonymity.

Queries mailed to Future Group, Reliance Group, State Bank of India and Bank of India on Thursday were not responded to.

A Breach Of Covenants

The termination notices, which means that potential business the company can generate will shrink, is being seen as a breach of covenants by the lenders. Commercial loan contracts typically include covenants which state that any event which impacts profitability and sustainability of the underlying business will be considered an event of default.

But even if banks see the current situation as an event of default, it will be of limited use.

Lenders are already in the process of classifying Future Group accounts as non-performing assets. This will likely happen in the ongoing January-March quarter.

This leaves lenders with two options—either take control of the security interest available to them through the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, or initiate insolvency proceedings against Future Group companies.

Neither option is ideal.

While some lenders are in favour of insolvency proceedings, larger public sector banks feel that such an action will lead to further erosion of value and result in minimal recoveries.

For now, lenders are hoping that Amazon, Reliance Group and Future Group come to an agreement through talks. Last week, both Amazon and Future Group agreed in court to hold a dialogue. The next hearing in the matter is scheduled for March 15.

To be sure, Reliance Group has maintained that it will honour the deal with Future Group, if the transaction were to proceed. It has even extended the deal deadline to Sept. 30, 2022. .

But lenders fear that the delay in deal closure, the operational support Reliance Group has been providing and now the takeover of stores, will mean that Future Group's assets will be worth much less than previously estimated.

In August 2020, when the deal was originally announced, the transaction was valued at around Rs 25,000 crore. According to the two public sector bankers quoted above, the value could drop by up to 40%.

Still, since any coercive action or insolvency proceeding against Future Group could lead to even larger losses, banks are pinning their hopes on talks to resolve the matter.

What Led To This?

The pandemic, a national lockdown and state-level restrictions resulted in severe losses for Future Group's businesses, which were facing financial troubles even before the Covid-19 crisis hit.

At the time, to aid Future Group, Ambani's Reliance Group offered to take over the leases of a large number of its stores to keep the business running. Reliance even offered its logistics, supply chain and inventory management services to ensure that the supply of goods is maintained.

But losses continued to mount.

On Feb. 26, Future Retail had informed exchanges that it was finding it difficult to finance the working capital needs of these stores. In the last four quarters, Future Retail alone has racked up losses worth Rs 4,445 crore, it said.

In response, Future Retail said it will curtail its physical operations and scale up the online and home delivery businesses.

None of these steps are likely to turn around the business in the near term.

As such, supporting a quick closure of the Reliance-Future deal is the only real option, said the bankers BloombergQuint spoke with.

Future Group Lenders Grapple With Uneasy Choices