S&P Global Ratings on Thursday lowered ratings on Future Retail to CCC-, vulnerable to non-payment grade, stating that the company’s liquidity position has weakened, exacerbated by the extended lockdown in India due to COVID-19.

The ratings agency said the Kishore Biryani-led retail major’s ability to meet its upcoming financial obligations is dependent on an improvement in business conditions or access to additional lines of credit.

S&P said it is lowering its preliminary long-term issuer credit rating on Future Retail and the preliminary long-term issue rating on the company’s $500 million senior secured notes to ‘CCC-’ from ‘B-’

“The ratings remain on CreditWatch with negative implications,” S&P Global Ratings said in a statement.

It further said, “Future Retail’s operating cash flows are likely to remain weak over the next two months.”

Explaining why it downgraded the company to the CCC- grade which implies that its ability to meet credit obligations is dependent upon favourable business, financial, and economic conditions, S&P said, “We anticipate a phased relaxation of the lockdown across India after the government’s deadline of May 3.”

This could mean a gradual recovery in revenue, it said adding, “However, we believe discretionary spending will remain low, given the expected decline in disposable income due to the economic impact of COVID-19“.

Sales in high-margin segments such as fashion (accounting for about one-third of the company’s revenue) are unlikely to pick up until later in the year.

“We believe Future Retail’s available cash and cash equivalents have fallen from ₹2 billion (₹200 crore) as of December 31, 2019,” it said.

Delay in banks’ credit

S&P further said Future Retail’s disbursement of approved credit lines from banks has been further delayed. This includes enhanced working capital credit lines of about ₹2,125 crore which were expected to be available in April 2020.

In addition, the company is proposing to avail its ₹6.5 billion (₹650 crore) peak-season working capital credit line to support its liquidity, the ratings agency added.

“We understand that the delays in disbursement are due to procedural issues during the lockdown and the company now expects them to be available by May 2020. We expect these credit lines to be sufficient to meet the company’s immediate funding requirements, should they become available. Timeliness remains critical, ” it said.

S&P also said potential debt restructuring at the operating and promoter group level remains an overarching credit risk, in its view.

“We are keeping our ratings on Future Retail on CreditWatch negative to reflect the company’s weakening debt-servicing ability and the likelihood that Future Retail or its related entities will restructure its debt within the next few months,” the ratings agency said.

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