Global rating agency Standard & Poor's (S&P) has set a negative outlook on UK based oil and metals mining company Vedanta Resources Plc., promoted by Indian born Anil Agarwal. S&P has kept its 'BB' long-term foreign currency corporate credit rating on Vedanta, which is listed in London but has most assets in India.
S&P, a division of US based The McGraw Hill Companies publishes financial research and analysis on stocks and bonds. It rates borrowers on a scale from AAA to D. A BB rated company faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions, which could lead to the company's inadequate capacity to meet its financial commitments. However, BB rated company is less vulnerable in the near term than other lower-rated firms.
S&P also affirmed the 'BB' issue rating on the company's senior unsecured notes and on the senior unsecured notes issued by Vedanta's wholly owned subsidiaries, guaranteed by the company. "We affirmed the rating on Vedanta to reflect our expectation that the company's oil subsidiary, Cairn India Ltd., will continue to perform strongly over the next 12 months because of favorable oil prices," said Standard & Poor's credit analyst Vishal Kulkarni.
"Cairn's contribution should offset the likely subdued cash flow generation at Vedanta's other entities due to weak metal prices and operating risks.The rating on Vedanta reflects the company's exposure to commodity prices, and country and operating risks in India.
Constraints include iron ore mining restrictions, time-consuming approval processes, and changes in taxes and royalties. These weaknesses are tempered by Vedanta's good business diversity following the acquisition of Cairn in 2011, the company's favorable market position in India, and its advantageous cost position, particularly in zinc and oil," S&P said.
S&P further said that production at Cairn was in line with their expectations and they believed that the company will continue to provide about a third of Vedanta's consolidated EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) in fiscals 2013 and 2014 (ending March).
"Country and operational risks in Vedanta's metals and mining businesses in India have yet to subside," said Kulkarni. S& believes that recent restrictions on iron ore mining in the state of Goa could have a material impact on Vedanta's EBITDA unless they are removed and production resumes to their earlier levels over the next three months.
Although iron ore do not contribute the majority of Vedanta's EBIDTA, they remain important since the cash flows from iron ore are not structurally subordinated to service liabilities of Sesa Sterlite (a subsidiary that will be formed after a corporate reorganization at Vedanta).Vedanta benefits from strong cash flow from its oil and zinc businesses. The diversity of its businesses--which include oil, base metals, iron ore and power--provides cash flow stability.
According to S&P, Vedanta's company's oil and zinc businesses are currently in the lowest cost quartile. The aluminum business can attain once Vedanta secures its own bauxite sources; the business is currently in the second cost quartile.The debt maturity at Vedanta and its subsidiaries is sizable, at about US$3 billion over the next two years.
"This will test Vedanta's current ability to access the capital markets. The company's refinancing plans include using meaningful cash from its subsidiaries to partially repay debt. The effectiveness of this strategy remains to be seen, given the large size of maturing debt.
Nonetheless, we believe Vedanta will continue to have access to multiple sources of funding from the capital markets.Vedanta's reorganization of its Indian subsidiaries should help to reduce and service debt at the holding company."