Large dividend from India helps Vedanta's refinancing efforts: Moody's

A large dividend from its cash-rich India operating subsidiary has boosted billionaire Anil Agarwal-led Vedanta Resources Ltd's efforts to refinance debt, Moody's Investors Service said on Monday.

On April 28, 2022, mining company Vedanta Ltd announced that its board of directors approved an interim dividend of Rs 11,710 crore (USD 1.56 billion) of which USD 1.02 billion will be received by its holding company Vedanta Resources Limited (VRL).

VRL owns 69.7 per cent of Vedanta Ltd.

"The large cash dividend is credit positive for VRL because it staves off some of the liquidity and refinancing risk tied to the holding company's debt maturities in the first half of the fiscal year ending March 31, 2023 (fiscal 2023)," Moody's said in an issuer comment.

At the same time, VRL has launched a tender offer to purchase for cash up to USD 500 million of its USD 1 billion senior unsecured notes maturing in July 2022.

The notes will be bought back at par, if the bonds are tendered by the early tender deadline on May 11, 2022.

Alternatively, they will be purchased at a 2 per cent discount to face value for bonds tendered after the expiration of the early tender deadline on May 11, but tendered before May 25, 2022.

"VRL's large debt maturities of USD 4 billion for fiscal 2023 include USD 2.75 billion alone at the holding company level, with the balance of USD 1.3 billion at various operating subsidiaries," Moody's said.

Of the holding company's USD 2.75 billion debt maturities, USD 2.1 billion is due during April-September 2022 and the balance of USD 650 million is repayable during the remainder of the year.

VRL's cash needs also include an intercompany loan repayment of USD 300 million in the first quarter of fiscal 2023 and a large interest bill that has climbed to USD 800 million annually.

"The expected USD 1 billion dividend receipt from Vedanta Ltd will, therefore, help alleviate only some of the immediate cash needs of the company," it said.

While the large cash dividend from Vedanta Ltd is credit positive, VRL's negative ratings outlook remains unaffected because of its still substantial cash needs over the remainder of the fiscal year.

"We estimate the just announced dividends and some new bank loans and rollovers will help the holding company tide over its cash needs during first half fiscal 2023, but not beyond, which indicates our view that liquidity risk will remain persistent.

"VRL also has another USD 2.9 billion in debt maturities in fiscal 2024," it said.

Dividends from its cash-rich and relatively low leveraged operating subsidiaries, and regular reliance on bank loans will remain pertinent, especially amid tight liquidity in capital markets and widening yields on VRL's existing US dollar bonds.

"VRL is weakly positioned at a Corporate Family Rating of B2, as reflected in its negative outlook, which is a result of the holding company's scarce liquidity. Absent its weak liquidity, VRL's operations are well positioned with favourable underlying demand and commodity prices that support continued positive free cash flow generation," the rating agency said.

During fiscal 2022, Vedanta Ltd, which accounts for largely the entire earnings generation at VRL, generated operating EBITDA of USD 6 billion, up 66 per cent from USD 3.6 billion in the previous fiscal year.