Reliance-Future Group deal to save lenders from Rs 12,000-crore hit

The financial instruments of Future group have gone through multiple rating downgrades in recent months due to the delay in payments

The deal involving the sale of some of Future Group’s businesses to Reliance Industries will protect their interest and principal, its lenders have said.

This is expected to save them from a hit on the loans portfolio of more than Rs 12,000 crore. 

While the deal would help the group avert a crisis, banks would be cautious in financing entities in its tent, said senior bankers involved in corporate lending.

Future group entities were standard assets but became stressed due to liquidity pressure. It is a case of business failure due to the pandemic, said a top executive with a private bank.

The loans of the listed entities of the group are about Rs 12,000 crore and those of promoter entities are of the same order.

The financial instruments of the group went through several rating downgrades in recent months due to delays in payment. The delays were on account of poor liquidity due to lockdown in the wake of the pandemic.

The liquidity profile of Future Enterprises Ltd (FEL) was affected on account of this, and it resulted in a weakened credit profile of its key customer, Future Retail.

FEL had sought a moratorium on payment from its lenders. The company had also applied to the bankers for enhancement in working capital limits, releasing peak limits, interchangeability of limits and Covid-19 lines, etc.

High working capital cycle

According to CARE, FEL had a high gross working capital cycle of 176 days in FY19. It deteriorated from 157 days in FY18. The high operating cycle was on account of more inventory days.

The company buys on behalf of group firms and goods are kept at various retail outlets across the country, thereby leading to a high inventory period of 16-18 weeks. 

The company receives payment after six-seven weeks from the sale of goods.

A public sector bank executive said engagement with Future Group would continue, but lenders would lay emphasis on governance and simple structures, and ensure prudent leverage.

The outlook on the retail sector is “negative” in the short to medium term due to Covid-19 and the lowering of discretionary spending by consumers.

The impact on demand, which is expected to stay muted at least for the next three or four quarters, will be more in the case of players with a presence in non-essential items and luxury segments.