Vedanta slips in S&P rating

Global rating agency Standard & Poor's today downgraded Vedanta Resources Plc's long-term foreign currency and senior unsecured debt ratings as it considered the $2.1 billion aluminium smelter project in Orissa a drag on the company. Vedanta's rating has been lowered to BB from BB+ and the outlook retained as 'negative'.

Vedanta is a diversified, integrated metals and mining group headquartered in London. The majority of its production facilities and 60 per cent of its sales are in India.

"The action reflects a downward shift in Vedanta's credit profile owing to increased business and financial risks following the company's December 2005 announcement of a new $2.1 billion aluminum smelter and power plant project in the Indian state of Orissa," said S&P credit analyst Anshukant Taneja.

The outlook on the rating remains negative, reflecting the persistent uncertainty in the company's obtaining the licences for mining bauxite in Orissa. Bauxite is a key component of Vedanta's ambitious expansion in the aluminum segment.

This investment, which is in addition to the $825 million outlay announced in the past six months, would be partly funded by additional long-term borrowings.

As a result, Vedanta's total debt is expected to increase by about $700 million, after incorporating the refinancing proposed by the company, S&P said.

"The company's revised plan deviates from earlier expectations of a steady improvement in its overall risk profile, even after factoring in the positive impact of timely completion of earlier projects and the recent favorable price environment," said Taneja.

The large scale of the new smelter project and its long construction period pose new challenges to its implementation. S&P is also concerned that softening demand for metals may result in lower-than-expected cash flows for partially funding the $2.9 billion projects, thus weakening credit protection parameters.

Oversupply situation in the domestic market, capacity additions proposed by other Indian manufacturers and the possibility of a further reduction in import duties would expose Vedanta to increased competition.