Moody's upgrades Vedanta Resources' corporate family rating to Ba3

Ratings reflects benign operating environment, stabilising commodity prices will aid in enhancing EBITDA, cash flow generation

Moody's Investors Service today upgraded London-based Vedanta Resources Plc's corporate family rating (CFR) and senior unsecured bond rating and placed a stable rating outlook for the company.

"The upgrade of Vedanta's ratings reflects our view that the relatively benign operating environment and stabilizing commodity prices will aid in enhancing the company's EBITDA and cash flow generation," Moody's quoted Kaustubh Chaubal, vice president and senior analyst. "Moreover, a substantial reduction in absolute debt levels will lead to an improving trajectory for its credit metrics," he added.

The upgrade also reflects significant progress that Vedanta has made in reducing absolute debt levels following the merger of its subsidiary Vedanta Ltd with the group's oil and gas subsidiary Cairn India. The company has reduced about 17 percent of its gross debt.

Meanwhile, higher sales volume led by an increase in production will pave the way for earnings and cash flow expansion, although annual capital expenditure aggregating $1.2-1.5 billion and dividend payments will likely limit free cash flow generation.

Vedanta's unsecured bond issuances in January and August this year -- each totaling $1 billion -- and a $840 million term loan for refinancing constitute proactive steps towards refinancing its debt maturities and lengthening the age profile of its debt.

Moody's expects the current operating environment and the company's track record in turning around its operations will help in Vedanta plc's ability to refinance the term debt -- largely owed to relationship banks -- aggregating $1.2 billion due over the next 16 months.

The CFR upgrade also takes into account Vedanta's large scale diversified business profile, as reflected by its presence in the copper, zinc, aluminum, iron ore, oil and gas, and power businesses across multiple geographies and track record of relative margin stability through commodity cycles.

Moody's rates the senior unsecured bonds issued by the holding company Vedanta Resources plc at B2 - two notches lower than the company's CFR (at Ba3) to reflect the bondholders' relatively weak position against the creditors of operating subsidiaries.

The two-notch difference reflects the acute legal and structural subordination of holding company debt holders to the rest of the group, due to a highly complex group structure with less than 100 percent shareholding in key operating subsidiaries.

The stable rating outlook reflects Moody's view that Vedanta's operating and financial metrics will continue to steadily improve with stable commodity prices. In particular, Moody's expects that its earnings expansion and a permanent reduction in gross debt will increase the pace of correction in the company's leverage. "The stable outlook also incorporates our expectations that Vedanta will continue with proactive liability management, refinancing its debt way ahead of scheduled maturities," said Moody's. Any departure from such financial policies could weigh on the ratings, it added.