Moody’s Investor Service has downgraded the corporate family rating (CFR) of London-based Vedanta Resources (VRL) and senior unsecured bonds issued by the company over increasing risk in refinancing debts.
The development follows a February report by S&P Global Ratings that the liquidity of VRL hinges on its fundraising abilities and the next few weeks would be crucial for the company.
According to Moody’s Friday report, VRL’s cash needs for the fiscal ending March 2024 remains large and include cross-border bonds of $400 million and $500 million due in April and May 2023, respectively, and a $1-billion bond maturing in January 2024.
The company also has an estimated $1.1 billion in term debt, $450 million of an inter-company loan, and an estimated interest bill of at least $600 million.
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VRL is the parent company of Indian mining major Vedanta
The ratings of CFR were downgraded to Caa1 from B3, and that of senior unsecured bonds issued by VRL and its wholly-owned subsidiary Vedanta Resources Finance II and guaranteed by VRL were downgraded to Caa2 from Caa1. “The outlook on all ratings remains negative.”
The negative outlook reflects VRL’s persistently weak liquidity profile and the rating agency’s concerns over the company’s ability to address its imminent cash needs.
“The rating downgrades reflect the increasing refinancing risk surrounding VRL’s large debt maturities. Ongoing delays in VRL’s refinancing efforts and its continued reliance on dividend receipts are depleting liquidity at its operating subsidiaries,” Kaustubh Chaubal, senior vice-president at Moody’s, said.
VRL has paid down around $2 billion of its debt in fiscal 2023. However, maintaining liquidity and proactive liability management are more pertinent in preserving VRL’s credit quality as opposed to debt reduction, it said.
“We previously expected VRL to find sufficient funds through loans and dividends to address its debt maturities until June 2023. However, VRL faces ongoing delays in obtaining funds relative to our earlier expectations amid a funding environment that remains challenging with high interest rates, scarce market liquidity and tight credit availability,” Chaubal said.
“These issues expose the company to material refinancing risks and exacerbate the likelihood of a payment default or a distressed exchange,” Chaubal, who is also Moody’s lead analyst for VRL, said.
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A large part of VRL’s cash needs during fiscal 2023 were met through dividend receipts and management fees from operating subsidiaries, thus substantially diminishing cash reserves. While ongoing operations and the subsidiaries’ sustained cash flow will help to build liquidity, VRL’s subsidiaries will need to raise debt if they have to pay large dividends to address the holding company’s cash needs.
Moreover, their depleting liquidity and the potential for contagion risk from VRL’s debt woes may impair the operating subsidiaries’ ability to raise funds. VRL’s liquidity remains weak with management fees and dividends from operating subsidiaries insufficient to meet its looming debt maturities.
On February 9, S&P Global Ratings said VRL’s liquidity hinges on its fund-raising abilities and the next few weeks would be crucial for the company, and added that the company is “highly-likely” to meet its obligations until September 2023. However, sustaining liquidity beyond that would depend on the completion of at least one of two key ongoing transactions. These include a targeted $2-billion fund raising exercise, and the proposed sale of international zinc assets by Vedanta, in which Vedanta Resources has 70% stake, to Hindustan Zinc (HZL), the report had said.