Standard and Poor’s Ratings Services on Wednesday said it is placing the ratings on Vedanta Resources PLC’s ‘BB-‘ foreign currency long-term corporate credit rating and the ‘BB-‘ long term issue ratings on the firm’s guaranteed notes and loans on CreditWatch with negative implications.
The placement reflects S&P’s view that Vedanta’s move to merge two of its Indian units – Vedanta Ltd., and Cairn India Ltd., – “is critical for the company to withstand a weakness in commodity prices,” credit analyst Mehul Sukkawala, wrote in his note on Wednesday. “However, the completion of the merger is uncertain, in our view.”
Earlier this year, Vedanta Resources has announced to merge two of its Indian subsidiaries Cairn India Ltd. and Vedanta Ltd., to create a commodities and resources company. But, some of the minority shareholders are against the move, as it give the London-based debt-laden company access to Cairn India’s cash reserves.
The ratings agency notes that the London-listed resources company has seen its cash flows deteriorate faster than what it had anticipated, hut by the recent decline in commodity prices. “At the same time, the company is seeking to arrange funds to refinance its US$2 billion debt due in mid-2016 and avoid a potential breach of its financial covenants over the next three months,” Mehul said.
While oil prices are weak, prices of aluminum have weakened significantly, and zinc prices have softened, S&P said, adding this has a “material impact” as zinc is the biggest contributor to Vedanta’s Ebidta. But the ratings agency expects aluminium to replace zinc in terms of Ebidta contribution, after the company increases production at Balco unit and Orissa smelter facility.
Apart from the increase in production in the next nine to 12-months, S&P says the company has delayed its capital expenditure by a year to fiscal 2018. “Nevertheless, we expect the company’s financial ratios to remain in line with a “highly leveraged” financial risk profile in fiscal 2017,” it says.
The proposed merger of the Indian units will help boost its financial ratios to “aggressive”, if it overcome the challenges surrounding the deal, it said. But, uncertainty remains ahead of the shareholders vote for the transaction scheduled during the current quarter through 2015.
Cairn Energy, a minority shareholder and the previous promoter of Cairn India had earlier said it would vote against the merger.
“We have revised our assessment of Vedanta’s liquidity to “less than adequate” from “adequate” to reflect our view that the company will not have adequate headroom under its financial covenant related to the ratio of net debt to EBITDA for the 12 months ended Sept. 30, 2015. We believe the covenant headroom will be about 5% as compared with our requirement of 15% headroom for an “adequate” liquidity assessment,” S&P note said.
The agency expects Vedanta to “meet the covenant testing for Sept. 2015” as it seeks to cut its net debt by trimming its working capital. This headroom is likely to improve during the quarter through March 2016, “with continuing generation of positive free operating cash flows and some improvement in operating performance,” it says.
Additionally, Vedanta’s relationships with banks should help the company to tie-up for refinancing for the $2 billion maturities in mid-2016, over the next 2-3 months, S&P note said. “These factors along with the potential for successful completion of the merger have resulted in us revising our assessment of comparable rating analysis to “positive” from “neutral.”
S&P aims to resolve the CreditWatch placement after Cairn India shareholder’s
vote on the proposed merger is complete, and could “affirm the rating if shareholders vote in favor of the merger. However, a negative vote could result in a downgrade.”
