Fitch places Cairn India Holdings on Rating Watch Negative on delisting plan

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June 11, 2020 1:20 PM

The current weak and volatile macro environment may pressure commodity prices below expectations.

Fitch said the delisting will nonetheless simplify the complex group structure.

Fitch Ratings has placed Cairn India Holdings Ltd on Rating Watch Negative (RWN) list following announcement by mining billionaire Anil Agarwal to delist its parent Vedanta Ltd. Cairn India Holdings Ltd (CIHL) , a subsidiary of Vedanta, was rated ‘B+’ by Fitch. “The action follows the announcement by (Agarwal’s) Vedanta Resources Ltd (VRL) of its intention to delist the shares of its Indian subsidiary and CIHL’s parent, Vedanta Ltd (VLTD). CIHL’s rating is aligned with the credit profile of VLTD, which owns 100 per cent of CIHL, reflecting their strong linkages,” Fitch said in a statement.

Should the delisting succeed, Fitch will assess the linkage between VRL and VLTD as ‘Strong’, rather than ‘Moderate’, and the agency will view the group as a single economic block. This will result in Fitch assessing VLTD’s credit profile based on the consolidated VRL Group, which Fitch believed is “weaker”. VLTD’s creditors have good access to its operating cash flow due to limits on cash leakages and being structurally and jurisdictionally closer to operating companies.

“But the delisting will give VRL greater access to the operating cash flows of VLTD and CIHL,” it said. “The absence of minority investors could also increase leakages outside the VRL Group, though Fitch has not considered any cash leakage from VLTD or CIHL, aside from the dividends to VRL.” “It also could increase governance risks, in respect of intercompany transactions, given concentrated shareholding,” it added.

Fitch said the delisting will nonetheless simplify the complex group structure. VRL Group will benefit from cash savings from lower dividend payments to minority shareholders, which could support liquidity and the group’s deleveraging over the long term.

“However, the potential for deleveraging is a function of the transaction price. The current Rs 87.5 per share offer price would mean that VRL could add around USD 2.1 billion of debt to finance the purchase of shares in its subsidiaries, and the amount could increase if the price rises,” it said.

The current weak and volatile macro environment may pressure commodity prices below expectations. VRL intends to delist 50.1 per cent-owned VLTD and indicated an initial offer price of Rs 87.5 per share. It was trading at Rs 104.70 on the BSE on Thursday and the current book value is Rs 222 per share.

“VRL would need USD 2.1 billion to acquire the shares it does not own in VLTD at the offer price, which we believe it will fully fund via debt,” Fitch said. The extension of VLTD’s production-sharing agreement at the Rajasthan oil block for another 10 years hinges on the resolution of audit issues in its cost recovery. The company believes the demand notice to be unwarranted and hasn’t made any provisions in respect to these demands.

“Amid the coronavirus pandemic, the government permitted the company to continue operations at the Rajasthan block, which was originally expiring in mid-May, until the extension is signed or three-months, whichever is earlier,” it said adding the risk around agreement extension is treated as event risk.

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