Local vs foreign: How a creditor revolt scuttled RIL's Future Retail deal

FRL's offshore bondholders -- a relatively smaller part of the creditor pool -- were promised 100% payment, while local lenders were asked to take a haircut

The preferential treatment of bondholders riled Indian banks enough to reject a $3.2 billion rescue deal from one of Asia’s richest men for a debt-laden unprofitable retail chain, according to people familiar with the matter.

Future Retail Ltd.’s offshore bondholders -- a relatively smaller part of the creditor pool -- were promised 100% payment, while local lenders were asked to take a haircut, the people said, asking not to be identified discussing confidential information. Secured Indian lenders were promised recoveries ranging between 34% to 88% of the total $4 billion in dues and even those payouts were staggered over seven years, the people said. 

The unequal treatment led to the rare move last week, when the local banks rebuffed billionaire Mukesh Ambani-led conglomerate’s offer, derailing what would’ve been the largest acquisition in the Indian retail sector. Reliance Industries Ltd. announced the purchase plan in August 2020 but struggled to complete the transaction in the face of legal challenges mounted by Amazon.com Inc., which argued it had the first right of refusal contractually.

Bank of India and State Bank of India, the main bankers to Future Retail, didn’t immediately respond to emails seeking comment on reasons for voting down the deal. Representatives for Future Group and Reliance also didn’t immediately comment. 

State-run lenders risked probes from federal agencies if they accepted these discriminatory terms, they said, explaining their preference now for a court-mediated insolvency process where bids are called in and there’s no risk of them being accused of cutting a bad deal. Bank of India has already requested an Indian court to initiate the process.  

Hard-Nosed Decision

The hard-nosed decision by Indian banks has pushed the teetering Future Retail, which ran one of the nation’s largest retail grocery chains before the pandemic struck, one step closer to bankruptcy. It has also taken the wind out of a tortuous two-year-old litigation between Reliance and Jeff Bezos-owned Amazon -- the e-tailer had started arbitration proceedings in Singapore to block the deal -- but left the door open for Ambani to snag these retail assets, possibly at an even cheaper price, under the bankruptcy process. 

“Reliance and other parties could be eligible to bid for its assets by submitting their resolution plans” even if Future Retail ends up in bankruptcy, according to Satwinder Singh, New Delhi-based partner at law firm Vaish Associates Advocates. “This would also lead to moratorium on any or all ongoing arbitration proceedings against Future.”

While the local lenders were agreeable to the deal when it was first announced, a lot changed in the past year or so, the people said. While the Amazon lawsuit dragged on, the asset value eroded and the pandemic worsened the cash crunch at Future Retail that began defaulting on its debt repayments.

Bloodless Coup

Reliance dealt a body blow to the Kishore Biyani-led Future Group in February when it quietly began poaching employees and taking over rental leases of hundreds of stores earlier run by Future Retail and Future Lifestyle Fashions Ltd. Ambani’s bloodless coup prompted Amazon to suggest settlement talks on the bitter dispute and alarmed Future’s investors and lenders who worried about asset-stripping.

The out-of-court truce talks between Amazon, Future and Reliance collapsed soon after they were initiated, the companies informed India’s top court on March 15. 

“A major turning point was when Reliance physically took over Future’s stores, which turned it into a no-holds barred situation,” said Devangshu Dutta, head of New Delhi-based retail consultancy Third Eyesight. “Before this the battle was being fought in courts and across the negotiating table. But at this point it moved over to the real business.”