S&P Global Ratings has downgraded London-headquartered Vedanta Resources (VRL) to “selective default”, terming the agreement to extend maturities of its dollar bonds as ‘distressed’.
VRL’s long-term issuer credit rating was downgraded from the earlier ‘CC’. It also lowered the issue ratings on VRL’s bonds due in January 2024, August 2024 and March 2025 to ‘D’ from ‘CC’. “We view VRL’s just concluded liability management exercise, which involved three of its dollar-denominated bonds, as a distressed transaction,” S&P said in a note, adding it was not an opportunistic move.
“The likelihood of a conventional default in the absence of the transaction was high. This is because of the company’s large upcoming debt maturities and reduced access to both internal cash flow and external financing. We do not consider the new terms of the proposed transaction as constituting adequate compensation to offset the maturity extension and some cashflow subordination to a new financing facility,” it said.
On January 3, VRL got bondholders approval to restructure bonds worth $3.15 billion maturing in FY24 and FY25. It also agreed to pay $779 million upfront along with a consent fee of $68 million (totalling $847 million), thereby pushing maturities to FY27 onwards.
VRL’s refinancing risks remain, despite a stronger capital structure post transaction. VRL has debt repayments of about $900 million each in FY25 and FY26. “While this is much lower than the company’s refinancing needs of about $3 billion annually over the past 2-3, we believe the maturities are still meaningful, given the company’s reduced financing access,” it said.
These debt maturities will need to be refinanced or met through the creation of additional dividend capacity at its subsidiaries, particularly at Hindustan Zinc, it added.
Earlier on December 14, S&P downgraded VRL’s long-term issue ratings of bonds to ‘CC’ from ‘CCC’ on a potential transaction involving extension of maturities of three dollar denominated bonds of $3.2 billion.
Separately, in its report dated January 10, Nuvama Institutional Equities said that VRL getting approvals to extend the maturity period of bonds would help in reducing debt of its Indian subsidiary Vedanta (VEDL). Further, the move will provide a much-needed liquidity flexibility to VEDL, which can now utilise cash flows to fund capex plans.
The brokerage firm said the successful debt restructuring of VRL removes a “major overhang” on VEDL stock. “The restructuring comes at a higher cost, but gives VEDL a two-year breather to focus on ongoing aluminium and zinc capex, and monetisation of steel and iron ore assets, which would unlock incremental cash flows,” it added.
