Vedanta's credit profile may weaken if Volcan draws more resources: Moody's

Moody's Investors Service Tuesday said the credit profile of Vedanta Resources Ltd could weaken if there is further flow of resources to its parent company Volcan Investments.

Moody's Investors Service said in a report said that Vedanta Resources' investment in December 2018, in a structured product issued by its parent, Volcan Investments Ltd, indicates a willingness to deploy funds to its parent that, if repeated, could weaken its credit profile.

"This willingness to deploy funds and Volcan's probable cash-flow shortfall by March 2020, support Moody's expectation that Volcan will likely tap on Vedanta's liquidity again when needed," it said.

The USD 561 million investment by Vedanta's wholly owned subsidiary, Cairn India Holdings Limited, resulted in Moody's changing its outlook on Vedanta's ratings to negative in February.

Vedanta Resources Limited currently has a Ba3 negative rating.

"We assess Vedanta's credit profile on a standalone basis without influence from its parent, but in light of the investment, Vedanta's separation from Volcan could become blurred," says Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer.

Volcan has a USD 900 million loan repayable over the next three years, and if this repayment responsibility falls to Vedanta, Moody's expects its liquidity to weaken.

"The transaction was not what we typically expect of high-profile Ba-rated issuers such as Vedanta, and further similar transactions could cause us to review Vedanta's governance and pressure its Ba3 rating," says Chaubal.

Moody's noted that "the high-yield lite covenant package for its outstanding USD 4.2 billion bonds does not restrict similar related party investments in the future, exposing Vedanta's creditors to significant cash leakage risk".

The company's cash holdings of USD 5.7 billion as of March 31, 2019 and the headroom under its debt incurrence covenant also reflect its capacity for further related party investments, if required by Volcan, it added.