Moody's flags Vedanta Resources' failure to take full ownership of unit

Failure may result in weakened liquidity for the group, says Moody's.

Vedanta Resources Ltd’s (VRL) failure to take full ownership of its profitable subsidiary Vedanta Ltd. (VDL) will weaken liquidity, said a report by Moody’s Investors Service. Moody’s had on October 20 placed VRL’s ratings under review for downgrade.

“Without operations of its own, VRL--as the holding company--needs to refinance debt maturities at a time of tight capital market liquidity, putting undue pressure on key subsidiaries to upstream cash,” the report quoted Kaustubh Chaubal, vice president and senior credit officer at Moody’s, as saying.

“Governance risk also remains high, with share pledges, persistently weak liquidity and large imminent refinancing needs reflecting an aggressive financial strategy and high risk appetite,” said Chaubal.

As of March 2020, around $7.5 billion (50 percent) of the Vedanta group’s total consolidated reported debt was set to come due through March 2022, including $2.5 billion at VRL and $425 million at its sole shareholder Volcan Investments.

Volcan has not infused any fresh equity into VRL since its 2003 initial public offering, even during periods of acute stress. Moody’s, therefore, does not expect any equity infusions in the future.

The group’s consolidated credit metrics remain far stronger than the economic reality. VRL fully consolidates partially owned operating subsidiaries, including 50.1percent-owned VDL and VDL’s 64.9 percent-owned subsidiary, Hindustan Zinc Limited (HZL). However, the holding company’s earnings available for debt servicing are restricted to the extent the operating subsidiaries distribute their surpluses in the form of dividends.

A successful takeover of VDL would have enhanced VRL’s access to the former’s cash flow and in turn improved bond yields and refinancing options.