Delisting not to impact Vedanta's credit profile, rating: Moody's

Mining mogul Anil Agarwal's plan to delist Vedanta Resources from the London Stock Exchange will not immediately affect the company's credit profile or rating, Moody's Investors Service said today.

"This is based on our expectation that Volcan (holding company) will not extract incremental cash from Vedanta to provide additional liquidity for itself," Moody's said.

In its issuer comment on Volcan offering USD 1 billion to acquire 33.47 per cent share it doesn't hold in Vedanta, Moody's said if Volcan requires the company to pay higher dividends to service its cash needs, it will tighten cash flow and add pressure to the corporate family rating.

"Vedanta's rating is based on the consolidated credit profile of Vedanta and its subsidiaries and does not take into account Volcan's indebtedness.

"Any change in Vedanta's policies, such that Vedanta is used as a financing vehicle for Volcan, will be viewed negatively and will also weigh on Vedanta's credit profile and rating," it said.

On July 2, Vedanta Resources and Volcan Investments, which holds 66.53 per cent stake in Vedanta, announced that they have reached an agreement in principle on the key terms of a possible recommended all-cash offer for the remaining shareholding of Vedanta.

If Volcan succeeds in increasing its stake to 90 per cent or above, it is likely that Vedanta will be delisted from the London Stock Exchange, making it a private company.

"Vedanta has a requirement under its bank loans to remain a listed company and will, therefore, need approval or waivers from its lenders prior to delisting," it said.

Moody's said Volcan is a private company with limited public information on its finances. In 2017, it raised an estimated USD 4.4 billion debt through the issue of convertible notes to buy a 19.35 per cent equity stake in Anglo American plc, pledging 33 per cent of Vedanta shares as security for annual interest payments of USD 185 million.

"If Vedanta maintains its dividend payout of 65 cents per share that it paid last year, we estimate Volcan's dividend income for its 100 per cent stake in Vedanta will result in a dividend income of USD 180 million, broadly matching the interest payment on the convertibles," it said.

Any potential dividends attributable to Volcan's 19.35 per cent stake in Anglo will flow to the holders of the convertible notes.

"These estimates do not take into account any other cash needs at Volcan being serviced via dividends from Vedanta. If other cash needs exist at Volcan, Vedanta and subsequently its 50.1 per cent owned key subsidiary Vedanta Ltd., would need to maintain higher dividend payouts," Moody's said.

Similarly, estimates also do not incorporate additional sources of liquidity for Volcan from its other investments, given that publicly available information is limited. Other sources of income or cash holdings at Volcan could reduce Volcan's reliance on cash from Vedanta to meet its funding needs.

Moody's said the reporting and disclosure requirements for private companies are less stringent than for London-listed public companies.

For instance, private unlisted companies are not required to report when any of their shareholding is pledged against any borrowings, it said.

"However, given its substantial access to international capital markets with USD 5.9 billion in debt outstanding at the holding company in the form of USD bonds and loans, we expect Vedanta to maintain its hitherto transparent reporting on operations even after it becomes a private entity," it added.