Vedanta business spinoff may not affect parent's credit quality: Moody's

Currently, there is no separate disclosure on free cash flow generation by the different businesses; after spinoff each entity will report separate financials

The spinoff of Anil Agarwal-led Vedanta Limited’s (VDL) businesses into separate listed companies, which will result in three new listed entities with a shareholding mirroring that of VDL is not likely to affect credit quality of Vedanta Resources assuming it proceeds as currently expected. This is because Vedanta Resources Limited’s (VRL) economic interests in all businesses will remain unchanged, a Moody’s report said on Monday.

Vedanta Resources Limited's 65.2 per cent owned subsidiary, Vedanta Limited (VDL), announced that its board of directors have formed a subcommittee to evaluate a potential spinoff of its aluminum, iron and steel, and oil and gas businesses into separate listed companies.

Following the subcommittee's evaluation of a potential spinoff, the board could also consider other alternatives such as strategic partnerships that would unlock value in its businesses for its shareholders.

The spinoff will be subject to approvals from regulators, the company's board, shareholders and creditors.

VDL noted that its board's rationale in evaluating a spinoff/strategic partnership is to unlock value for its shareholders and to help in better transparency in the deployment of the cash surpluses from each business towards reinvestment or towards dividends.

In the current structure, there is no separate disclosure on the free cash flow generation by the different businesses.

But after spinoff each entity will report separate financials, VRL's consolidated profile will continue to draw the benefits of a diversified business model in maintaining profitability amid volatile commodity price cycles.

Following the spinoff, the VRL group will comprise five listed entities. Four of them, VDL and the three newly listed companies will have the same shareholding. The group's listed zinc subsidiary, Hindustan Zinc Limited (HZL) will continue to be 64.9 percent owned by VDL. VRL's consolidated credit metrics remain unchanged because its economic interest in all of its businesses will be the same with the spinoff.

“We expect VDL's standalone debt to be transferred to the three listed companies equitably,” said Moody’s.

Importantly, we expect VRL to continue to exercise management control over VDL and HZL, and for the same governance in its management of the new listed companies, it said.