Lenders, which have significant exposure to both Future Retail Ltd (FRL) and to its promoters, are nudging the company to go for an all-stock merger with an existing retail player. This bank move was expedited after its promoter Kishore Biyani defaulted on loans in March this year and FRL's share price collapsed from its recent high in February this year.

According to a banker close to the development, the lenders have approached India’s top retail players to evaluate the possibility of a merger. “The company may not get a good valuation due to the falling financial metrics. It is also short in cash of around Rs 200 crore (as on Dec 2019). Banks have therefore approached all big players including Reliance Retail whether it is interested in acquiring the company,” said a banker.

A RIL spokesperson declined to comment citing market speculation. Future officials were not available for comment.

On Tuesday, Future Retail stock closed down by 5 per cent to Rs 77 a share – giving it a total market valuation of Rs 4,000 crore. The share was trading at Rs 377 a share in February this year.

The promoters own close to half of the company’s equity and of this, 50 per cent is pledged with the banks. A share fall since February this year will lead to banks owning more equity in the company. With the promoters seeking debt restructuring both at the operating and promoter group level, banks have advised the company to go for asset sales to pay their dues.

Banks are also worried that the restructuring of onshore debt at Future Retail and other related entities could trigger a cross-default on its $ 500 million senior secured notes. The restructuring of promoter debt could trigger the change-of-control clause on the company's senior secured notes, as the promoter shareholding will fall below 26 per cent, they warned.

Analysts said the company’s sales in high-margin segments such as fashion are unlikely to pick up until later in the year due to the pandemic. This accounts for almost one-third of its sales. At the same time, banks have slowed down Future Retail's disbursement of approved credit lines from banks.

This includes working capital credit loans of about Rs 2,125 crore which were expected to be available in April 2020. In addition, the company is proposing to avail of its Rs 650 crore peak-season working capital credit line to support its liquidity.

For the time being, the company may manage to dodge the bullet as banks may release working capital by this month and help meet the immediate funding requirement.

“The company is on borrowed time. The faster it seals asset sale plans, it’s better. Timeliness to sell assets remains critical,” said a banker.