Stretched credit profile: Moody’s downgrades outlook on Vedanta Resources to negative

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Published: July 30, 2020 1:00 AM

The agency has confirmed Vedanta Resources' B1 corporate family rating (CFR) and the B3 rating on the company's senior unsecured bonds.

“The negative outlook also reflects the acute refinancing risk associated with the company's large debt maturities,” Moody's noted.“The negative outlook also reflects the acute refinancing risk associated with the company’s large debt maturities,” Moody’s noted.

Moody’s Investors Service has downgraded its outlook on all ratings for Vedanta Resources to negative. “This concludes the rating review initiated on March 24, 2020,” the agency said, adding the negative outlook reflects its view that Vedanta’s operating and financial metrics will remain sensitive to movements in commodity prices that are exposed to further downside risk. “The negative outlook reflects the company’s weak liquidity and sizeable upcoming refinancing needs under extremely challenging market conditions,” the agency observed.

“The negative outlook also reflects the acute refinancing risk associated with the company’s large debt maturities,” Moody’s noted.

The agency has confirmed Vedanta Resources’ B1 corporate family rating (CFR) and the B3 rating on the company’s senior unsecured bonds. It has also confirmed the B3 rating on the senior unsecured bonds issued by the company’s wholly-owned subsidiary, Vedanta Resources Finance II Plc, and guaranteed by Vedanta.

“The confirmation of all ratings recognises that while Vedanta’s credit profile will remain stretched, reflecting the challenges brought on by the pandemic, we believe that the company’s financial metrics will likely recover to levels appropriate for its current ratings in the fiscal year ending March 2022 (fiscal 2022),” Moody’s wrote in a note.

The ratings confirmation reflects Moody’s expectation that Vedanta’s leverage, as measured by adjusted debt/Ebitda, will improve to 3.5x-4.0x during fiscal 2022 after remaining about 5.0x – 6.0x in fiscal 2021. Aside from refinancing risk, the negative outlook also indicates the risk of a downgrade if the coronavirus driven downturn causes the volatile commodity prices to drop further, thereby posing downside risks to Moody’s current expectations.

These leverage estimates are based on Moody’s price-sensitivity analysis and expectation that Vedanta will reduce debt and deleverage following the privatisation of Vedanta Limited. Vedanta is in the process of fully privatising Vedanta Limited by increasing its stake to 100% from 50.1%. The transaction, which has been approved by both companies’ shareholders, is now pending price discovery. At the closing price of Rs 112.05 per share on July 27, the additional 49.9% stake in Vedanta Limited was valued at $2.7 billion. Vedanta plans to fund the transaction by raising new debt.

As a result, Moody’s expects that the company’s consolidated leverage will rise to 6.0x in March 2020, up from 5.0x before the transaction. However, immediately following the privatisation, Moody’s expects the company to reduce its debt by at least $2.0 billion, keeping its consolidated leverage around the 5.0x mark.

Moody’s views the privatization as credit positive and a major step in the simplification of the company’s complex group structure with less than 100% ownership in operating subsidiaries, which has historically hindered its credit profile. The privatisation will provide Vedanta with better access to future cash surpluses and cash of around $1.7 billion held at Vedanta Limited and its wholly-owned subsidiary, Cairn India Holdings Limited, in addition to improving its cash access and ability to allocate assets and liabilities across the group.

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