Cairn India's merger with Vedanta "uncertain", says S&P

Rating agency Standard & Poor's today said completion of the proposed merger of Cairn India with Vedanta Ltd appears "uncertain".
The global rating agency also placed its 'BB-' foreign currency long-term corporate credit rating on the Anil Agarwal led mining conglomerate Vedanta Resources on CreditWatch with negative implications.
In a statement, Standard & Poor's Ratings Services said, "It had placed its 'BB-' foreign currency long-term corporate credit rating on Vedanta Resources PLC (Vedanta) and the 'BB-' long-term issue ratings on the company's guaranteed notes and loans on CreditWatch with negative implications."
S&P's credit analyst Mehul Sukkawala said the CreditWatch placement reflects the agency's view that Vedanta's proposed merger of subsidiary Cairn India Ltd with intermediate holding company Vedanta Ltd is critical for the company to withstand a weakness in commodity prices.

"However, the completion of the merger is uncertain, in our view. Vedanta's cash flows have deteriorated more than we expected owing to a recent decline in commodity prices.
"At the same time, the company is seeking to arrange funds to refinance its USD 2 billion debt due in mid-2016 and avoid a potential breach of its financial covenants over the next three months," he added.

Vedanta's proposed merger will strengthen the company's financial ratios if it can overcome the challenges surrounding the deal, the agency said.
The merger could strengthen the firm's financial ratios to levels in line with an "aggressive" financial risk profile in fiscal 2017, it added.

"However, uncertainty remains over the conclusion of the merger until a shareholders' vote, which we believe would happen in the latter half of the December quarter in 2015," S&P said.
The decline in commodity prices in recent months has lowered the company's cash flows. Oil prices remain weak, aluminium (both London Metals Exchange prices and the physical premium) prices have weakened significantly and zinc prices have softened, it added.
"Lower prices have a material impact on Vedanta because zinc accounts for the largest share of the company's EBITDA, and we expect aluminium to become a large contributor to EBITDA following the company's planned ramp-up at Jharsuguda (a smelter in Orissa) and subsidiary Balco," it said.

The agency said it expects Vedanta to continue to ramp up its Jharsuguda operations although it has postponed the ramp-up of Balco operations by nine to 12 months. It has also pushed some of the capital expenditure to fiscal 2018 (year ended March 31) from fiscal 2017.
"Nevertheless, we expect the company's financial ratios to remain in line with a "highly leveraged" financial risk profile in fiscal 2017," it added.