Further leverage build-up at parent firm Volcan could derail Vedanta’s debt-reduction plan, warns India-Ratings

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Published: May 23, 2019 4:29:21 PM

However, it said: “A higher-than-anticipated support, including any funding to support acquisition of Anglo American’s voting rights shares, will lead to negative rating action.”

In a note on Wednesday, Ind-Ra said the management has reiterated to the agency that there will be no further participation in any financial transaction with Volcan and the said transaction will unwind on their maturity dates.

India Ratings and Research (Ind-Ra) on Wednesday said a further leverage build-up at Vedanta Ltd’s ultimate parent Volcan Investments (Volcan) could potentially derail Vedanta’s deleveraging plan. The ratings firm said higher-than-expected support to parent is credit negative for the firm.

As of March this year, Vedanta is 50.1% held by Vedanta Resources, which, in turn, is wholly owned by Volcan. In February, Vedanta had said Cairn India Holdings (CIHL), an overseas subsidiary, was offered the opportunity by Volcan to invest some of its surplus cash resources in a structured investment, representing the economic interest in upside potential of around 24.71 million shares (about 1.8% of outstanding shares) of Anglo American (AA Plc).
The company, in a statement, had further said it felt that the risk adjusted returns of this opportunity relative to other available investments, it elected to invest a portion of its available cash resources, as part of its cash management activity. “The ownership of the underlying shares, and the associated voting interest, remains with Volcan,” it said.

As part of the transaction, in FY19, CIHL purchased an economic interest in Anglo American shares held by Volcan through a structured investment for £428 million. This structure matures in parts in April 2020 and October 2020. CIHL has paid a portion of this investment at March end 2019; the agency expects the balance amount of £232 million to be paid in FY20.

In a note on Wednesday, Ind-Ra said the management has reiterated to the agency that there will be no further participation in any financial transaction with Volcan and the said transaction will unwind on their maturity dates.

However, it said: “A higher-than-anticipated support, including any funding to support acquisition of Anglo American’s voting rights shares, will lead to negative rating action.”

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