Standard & Poor’s on Tuesday lowered its foreign currency long-term corporate credit rating on London headquartered Vedanta Resources to ‘B+’ from ‘BB-‘.
The development comes more than two months after Crisil revised downwards its grading of long-term debt instruments of Vedanta.
S&P also lowered its long-term issue ratings on the notes and loans that the company issued or guarantees to ‘B+’ from ‘BB-‘. Citing expected weakness in the oil & metals company’s financial performance over the next 12 to 18 months, the global credit rating agency said the outlook for the company is negative.
“We downgraded Vedanta Resources because we expect the company’s financial performance to remain weak for 12-18 months,” said S&P’s credit analyst MehulSukkawala. He added that low commodity prices, including “our recent lowering of oil price assumptions, have hurt Vedanta Resources’ cash flows, which were already stretched by the company’s high debt”.
S&P said those financial ratios remain weak irrespective of whether the company is successful in completing the merger between its intermediate holding company Vedanta and its subsidiary Cairn India.
The agency said that it expects Vedanta Resources’ ratio of funds from operations (FFO) to debt (on a proportionate
consolidation basis) to remain below 10% until fiscal 2016- 2017 compared with about 6%
in FY15. This is even after assuming an improvement from the current weak commodity prices and volumes across most businesses.
S&P also included $1.6 billion of interest rating payables in its calculation of the company’s debt and therefore revised its assessment of Vedanta Resources’ financial risk profile to “highly leveraged” from “aggressive”.
“We may lower the ratings if we expect Vedanta Resources’ proportionately consolidated ratio of FFO cash interest coverage to remain below 1.75x on a sustained basis,” added the agency in a media release.
The rating agency noted that Vedanta Resources is dependent on banks to roll over its short-term debt and to help refinance the $2 billion of maturities in June/July 2016. However, it added that its decent banking relationship and good credit standing of group company Vedanta in India, will help Vedanta Resources roll over its short-term debt and meet its near-term refinancing requirements.
When Crisil lowered its rating on the long-term debt instruments and bank facilities of Vedanta to ‘Crisil AA/Stable’ in early August it acknowledged that the company is likely to report lower than expected consolidated Ebitda as it battles with weak commodity prices, slow ramp-up of the company’s aluminium smelting and power capacities, and lower volumes from the iron ore business. Consequently, Vedanta’s net debt to Ebitda, the agency said is likely to significantly exceed its expected ratio of 2.5 times and may take longer to improve.