Moody's places Vedanta Resources CFR under review for downgrade

This stems from increase in refinancing risk and large funding needs at holding company level, following firm's failure to delist Vedanta Ltd

Moody's Investors Service today placed Vedanta Resources Limited's B1 corporate family rating (CFR) under review for downgrade.

Concurrently, Moody's has placed under review for downgrade the B3 ratings on the senior unsecured bonds issued by Vedanta and those issued by its wholly-owned subsidiary, Vedanta Resources Finance II Plc, and guaranteed by Vedanta, affecting $4.2 billion in outstanding debt.

The ratings outlook was changed to ratings under review from negative.

"The review follows an increase in refinancing risk and significant funding needs at the holding company level, following Vedanta Resources' failure to acquire the balance shareholding in key subsidiary Vedanta Limited that would have improved access to group cash," the report Kaustubh Chaubal, a Moody's vice president and senior credit officer as saying.

On 10 October, the company announced that its voluntary delisting offer--to acquire the balance shareholding in key subsidiary Vedanta Limited and then delisting it from the stock exchange--had failed at the reverse book building stage.

The total number of shares tendered by Vedanta Limited's public shareholders fell 7 per cent short of the mandatory minimum 90 per cent for successful delisting.

Moody's had viewed the proposed delisting as a credit positive and a step forward in simplifying the group's complex shareholding structure, that would have allowed for better access to consolidated cash while avoiding leakage during dividend distributions.

With the failed delisting, the holding company's liquidity risk has increased with around $2.9 billion in debt maturities between April 2020 and March 2022 (including a $120 million revolving credit facility repayable in February 2021 and $425 million--the remainder of Volcan's debt to privatise Vedanta Resources) and annual interest payments of $470 million each year.

Moody's expects the holding company to arrange part of the required funds from intercompany loans from foreign subsidiaries, dividends from operating subsidiaries and continued refinancing. However, falling bond prices and widening yields on the company's USD bonds cast downside risks to the holding company's ability to refinance in a timely manner.

More importantly, in order to maintain its current ratings, Vedanta would need to secure long-term refinancing and demonstrate its continued access to financing from relationship banks, especially at the holding company.

Moody's review will focus on the holding company's ability to refinance its upcoming debt maturities in the fiscal year ending March (fiscal 2021) and fiscal 2022. Moody's expects to conclude the review within 90 days.

In the first half of the fiscal 2020, Vedanta Limited raised around $1.3 billion in new debt facilities by pledging its 14.82 per cent shareholding in cash-rich and profitable 64.9 per cent owned subsidiary Hindustan Zinc Limited (HZL).

Moody's assesses the share pledge, the holding company's persistently weak liquidity and refinancing needs as indicators of an aggressive risk appetite with implications for the company's financial strategy and risk management, a component of our governance risk assessment framework. Today's rating action considers the impact of Vedanta's governance practices on its credit profile.

Vedanta Resources Limited, headquartered in London, is a diversified resources company with interests mainly in India. Its main operations are held by Vedanta Ltd, a 50.1 per cent-owned subsidiary. Through Vedanta Resources' various operating subsidiaries, the group produces oil and gas, zinc, lead, silver, aluminum, iron ore and power.