Analysing Future Retail's May 2020 Bond Issue

Recently I learnt about the ₹650 crores (~$21M) bond issue by Future Retail. I thought of writing this quick post to analyse the issue. We will evaluate the issue on several factors I mentioned in an earlier post on debt funds and corporate bonds.

Before I begin, please read these two news articles for background information:

1. https://theprint.in/economy/amazon-backed-future-retail-set-to-tap-bond-market-amid-cash-crunch/431690/

2. https://www.firstpost.com/business/future-retail-to-raise-up-to-rs-650-cr-to-reduce-debt-by-issuing-non-convertible-debentures-8414591.html

3. https://www.fitchratings.com/research/corporate-finance/fitch-assigns-fubture-retail-final-rating-at-ccc-on-liquidity-pressures-06-05-2020

I have attached PDF versions of these articles at the end of the post in case these are no longer online when you are reading this.

Key Takeaways

1. The group already defaulted on its debt repayment obligations in March. This is a big red flag which the Print article doesn't even mention.

2. I don't even know what does domestic rating of "A-" means. For a company which defaulted on its debt in March, a rating of "A-" seemed high to me. So, I searched for its rating and found the third article above, which says that Fitch's rating of Future Retail is "CCC+."

3. Bond issue carries interest of 9.95%, where an "A-" company should be able to raise money at 7.65%. I reckon they are offering such high rate of interest because 1) banks won't lend them the money, and 2) to tempt retail investors with high returns. This also indicates the high-risk involved in this issue.

4. Both articles say that the money raised would be used to replace existing high-cost debt. It sounds like a good business decision because the company would save money on interest expense. However, the fine print mentions that Future Retail needs to raise this money to repay debt obligations in May and June. They are taking a loan to repay an old loan. We learn of no plans to invest in growth. How will they make money in future to repay the new debt? Again, a red flag to me.

5. The Print article makes the bond issue seems like a good deal for investors - company is replacing high-cost debt, offering 9.95% interest, domestic rating of "A-," and Amazon holds 1.3% stake in the company. This is a classic case of "if it is too good to be true, it is."

In my opinion, there are many red flags in this issue and unless I have more information on growth plans of the company, I would stay away from this issue. The Print article exposes the ugly truth of the industry. I would not be surprised if the company’s PR team influenced their article.

The domestic rating of “A-” is my biggest concern. A fund manager may invest in this issue quoting the A- rating. I hope, just like me, the fund manager would raise concerns about the rating and growth plans of the company, but, honestly, I doubt it.

The COVID-19 lockdown has left business all over the world scrambling for cash. This bonds issue is just one of the many that we will see in the coming months. This is the time for investors to not get overwhelmed and stay focused on the basics.

Attachments: PDF files of the News Articles

1 The Print Future Retail Bond Issue 29-

Download • 1.68MB

2 First Post Future Retail 27-May-2020.p

Download P • 897KB

3 Fitch Rating Future Retail 6-May-2020

Download • 4.41MB