Vedanta yields slump may force it to back out of Cairn deal

Vedanta Resources Plc’s bond yields and credit default swaps signal the UK miner’s plan to buy Cairn Energy Plc’s Indian exploration unit may collapse, helping avert a debt downgrade on the $9.6-billion acquisition.

Bondholders oppose the deal and are confident the purchase will be called off as the companies await approval from the government, according to Aberdeen Asset Management Ltd and Erste Sparinvest KAG. The yield on Vedanta’s dollar bonds maturing in January 2014 touched a five-month low last week, according to data compiled by Bloomberg. The cost of insuring the company’s debt against default dropped to a nine-month low.

“From bondholders’ perspective, it would be positive if the deal with Cairn doesn’t go through,” said Peter Varga, who helps manage about $200 million of emerging market corporate debt in Vienna at Erste Sparinvest, and holds Vedanta bonds. “Their capital expenditure plans will already ensure higher leverage in the coming years.”

Vedanta, the largest copper producer in India, agreed to borrow $6 billion from a group of eight banks for the acquisition. That will add to its existing $7.3 billion of debt, according to data compiled by Bloomberg.