Vedanta faces refinancing risk for debt maturities in FY17 : Moody's

Sharp decline in oil price and reduction in taxes on production will have a muted impact on Vedanta's earnings

Downgrading Vedanta Resources corporate family rating, Moody's Investor Service Monday said the metals and mining conglomerate faces a refinancing risk.

The ratings agency has also downgraded the firm's senior unsecured rating to 'Caa1' from 'B1' and the outlook on all ratings is negative, it said in a statement.

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"Downgrade of Vedanta's ratings is driven by low commodity price environment that will keep earnings improvement distant and slower correction in leverage metrics than initially anticipated," Moody's Vice President and Senior Analyst Kaustubh Chaubal said.

Rating actions also incorporate the "refinancing risk that the company faces, in particular, in relation to its debt maturities during the financial year ending March 2017 (2016-17)", he added.

The rating actions reflect Moody's view that there has been a fundamental downward shift in the mining sector with the downturn being deeper and the recovery longer than Moody's had previously expected, he said.

This is resulting in increased credit risk and weaker credit metrics for Vedanta, as well as global mining sector. Consequently, ratings need to be recalibrated to reflect the companies' expected performance over a more protracted challenging operating environment, Chaubal added.

At the same time, the reduction in taxes on production of oil to 20% ad valorem ($6-7 per barrel at current prices) from Rs 4,500 per tonne will lower the cash cost of production by some USD 2-3 a barrel.

However, the decline in oil prices has been so sharp that the reduction in taxes on production will have a muted impact on Vedanta's earnings, he said.

Vedanta's B2 CFR also reflects refinancing risks associated with its $2.67 billion debt maturities in the next financial year.

The company's FY 2016-17 maturities include $1.9 billion due in the April--July 2016 period and the balance $0.77 billion due in the remainder of the year.

"While the company has so far secured financing for a part of these debt maturities, the absence of a completely executed refinancing plan keeps near term liquidity risk imminent," he said.

Slowing economic growth rates in China materially impact the demand for base metals and prices globally. Even as the Government of India's move to raise duties on imports of aluminium and zinc will raise selling prices in India, the impact will be modest, he added.

Moody's recognises that on a consolidated basis Vedanta has large cash balances of $8.9 billion although almost 90% of which is held at its two listed subsidiaries Hindustan Zinc and Cairn India, the agency said.