Lenders to crisis-ridden Future Retail may not have to take a deep haircut on their exposure the company, even as it is hauled into the bankruptcy process by lenders, top bankers and analysts told Moneycontrol on 15 April.
This is because banks anticipate Future Group’s deal with Reliance Industries to go through, at a time when most of their exposure to the account is already provided for. Haircut, in banking parlance, refers to the monetary sacrifice banks need to make on their original loan exposure during the resolution process of a stressed borrower.
“The bankers’ consortium, Reliance Industries, and Future Retail seem to have their interests aligned in completing the deal,” said Varun Khandelwal, fund manager and director at Bullero Capital. “The NCLT filing is just a pressure tactic. Ultimately, banks know that the Reliance deal is the only option possible in interest of debt recovery and will probably lead to minimal haircut as the resolution plan (for the group) is to the tune of Rs 24,000 crores.”
The lenders’ consortium, led by state-run Bank of India, took Future Retail to the Mumbai-bench of the National Company Law Tribunal over non-payment of dues, Future said in an exchange filing on April 14.
Apart from Bank of India, lenders like State Bank of India, Union Bank of India, Bank of Baroda, Indian Bank and IDBI Bank are some of the banks that have exposure to Future Retail.
Future Retail owes banks Rs 5,322.32 crore as on March 31, according to Bank of India’s petition filed in the bankruptcy court, a lawyer said. Future Retail, in the regulatory filing, said that it has received a copy of this petition and is in process of taking legal advice.
Future Group, which is on the brink of liquidation, is currently locked in a long-drawn-out legal dispute with Amazon. The dispute comes as the two companies are locked in a bitter feud over the debt-ridden Indian company’s announcement in 2020 to sell its retail, wholesale, warehousing, and logistics businesses to billionaire Mukesh Ambani’s Reliance Industries in a deal worth $3.4 billion.
Even though the case is pending across multiple courts, Reliance, in February, bailed out Future Retail by transferring the leases of some stores to its name and subletting them to the group to operate.
Amid the legal dispute, some banks have declared the account as non-performing asset. Meanwhile, the Supreme Court, in February, had also refused to pass any interim orders restraining banks from classifying Future Retail as a NPA, despite the litigation. Banks had suggested an open bid between Amazon and Reliance to settle the dispute, but that did not lead to any desired outcome.
Bankers said that likely to be no major haircut to lenders, who have lent for business operations, assuming the Reliance deal goes through.
“Banks were apprehensive about the debt-servicing capacity of Future. Now, if the IBC process formally begins, the ball is with the Committee of Creditors and the Reliance deal seems pretty lucrative for banks, which in all likelihood should be considered,” a senior banker said on the condition of anonymity.
In most cases resolved under the IBC route, lenders have had to take deep haircuts towards their exposures. For example, in the case of Dewan Housing Finance, lenders ended up taking a haircut of over 50 per cent under Piramal Group’s resolution plan. Financial creditors to Jet Airways also took a haircut of over 90 per cent under Jalan-Kalrock’s consortium.
Analysts also said that the outcome of creditors meeting of Future Group for approving the Future-Reliance deal will have a major impact on banks’ decision to continue insolvency proceedings against Future Retail, while legal aspects could complicate the deal.
According to Shivek Sharma, Associate at Pioneer Legal, once the application for initiation of corporate insolvency resolution process is admitted by NCLT, a moratorium under Section 14 of IBC will be imposed post which Future Retail will be prohibited from transferring or disposing of its assets. “Further, any institution of suits or continuation of proceedings against Future Retail will be prohibited during such moratorium,” Sharma said.
If the petition is admitted, “bankers also have recourse against the guarantors,” according to Murtaza Kachwalla, Partner, Argus Partners (Solicitors & Advocates).
Banks can file appropriate proceedings before the Debt Recovery Tribunal and NCLT can be filed against the guarantors, Kachwalla added.
