Fitch Ratings affirmed Future Retail Limited's long-term issuer default rating (IDR) at 'RD' (Restricted Default) on Friday.

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The 'RD' rating reflects the uncured default in meeting repayment obligations on the bulk of FRL's onshore debt, which was restructured under the Reserve Bank of India’s (RBI) August 2020 One Time Restructuring (OTR) framework.

(The 'RD' IDR on the international scale indicates an issuer that, in Fitch's opinion, has experienced an uncured payment default or a distressed debt exchange on a bond, loan, or other material financial obligation, but that has not entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, and has not otherwise ceased business.)

Fitch had downgraded FRL to 'RD' in April 2021 after it completed the restructuring as it viewed it as a distressed debt exchange (DDE). However, the resultant debt structure and maturity profile remained unsustainable and did not meaningfully address FRL's financial stress, which is required for an upgrade after the completion of a DDE, the rating agency said.

It has also affirmed FRL's $500 million 5.6 percent senior secured notes due 2025 at 'C', with a Recovery Rating of 'RR5'.

Fitch gave Future Retail an‘ RD’ rating as the firm failed to repay Rs 88 billion in recast obligations under the OTR, comprising Rs 35 billion due on December 31, 2021, for which the grace period expired in January 2022, and Rs 53 billion due on March 31, 2022.

This followed persistent operating losses since the financial year ending March 2020 and ongoing litigation that has hampered FRL's ability to generate funds from alternative sources, Fitch said.

The risk of FRL undergoing a deeper restructuring or formal insolvency proceedings has risen in view of its default and the ongoing uncertainty in completing an announced business sale to an indirect subsidiary of Reliance Industries Ltd, the rating agency said.

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It added that a more conservative approach by onshore lenders, particularly after the closure of stores that accounted for 55-65 percent of revenue in March due to non-payment of sub-lease rentals to RIL entities, can limit FRL's ability in managing its daily liquidity needs, including servicing debt outside the OTR.

It must be noted that Fitch’s rating comes with the assumptions that Future Retail’s sales shall drop by 51 percent in FY23 in view of store closures and poor liquidity, and EBITDAR margin shall remain negative at -16.2 percent in the fiscal.

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