Billionaire Anil Agarwal-controlled Vedanta Resources Ltd's proposal to take its India-listed subsidiary Vedanta Ltd private will give it access to cash surpluses in the oil and gas business unit, Moody's Investors Service said Tuesday.
Vedanta Resources Ltd (VRL), which owns 50.1 per cent of Vedanta Ltd, has offered to acquire all of the balance 49.9 per cent shareholding held by the public and delist the company from the BSE.
On May 18, Agarwal-chaired board of directors of Vedanta Ltd approved its parent, VRL's open offer.
Moody's in an issuer comment said the move will simplify group structure and is credit positive.
"The proposal will now be put to a shareholder vote and needs to be approved by at least 66.7 per cent of minority shareholders," it said. "The acquisition of the minority stake will be at a price that is the higher of either the floor price, Rs 87.5 per share a 10 per cent premium over the closing market price of Rs 79.6 on May 11 or the price discovered through the reverse book building process."
The transaction, it said, is credit positive and is a major step in the simplification of Vedanta's complex group structure of less than 100 per cent ownership in operating subsidiaries, which has historically been a drag on its credit profile.
"If successful, the transaction will provide VRL better access to future cash surpluses and cash of around USD 1.4 billion held at Vedanta Ltd and its wholly-owned subsidiary, Cairn India Holdings Ltd, at December 2019.
"Additionally, VRL's higher shareholding in Vedanta Ltd will substantially reduce cash leakage, while extracting dividends from step-down subsidiary Hindustan Zinc Ltd, which held cash of USD 3 billion at December 2019," it said.
The transaction will also enable VRL the flexibility to allocate its assets and liabilities across the group, including moving debt closer to operating assets, the rating agency said.
Notwithstanding these long-term positives, the debt-financed transaction will further weaken VRL's consolidated credit metrics, which are already stretched, and comes at a time of heightened macroeconomic uncertainty with disruptions caused by coronavirus pandemic and resource price declines dampening the company's earnings and cash flow generation.
"At the initial offer price of Rs 87.5 per share, VRL's cash outflow for the 49.9 per cent shareholding in Vedanta Ltd will add USD 2.2 billion in additional borrowing.
"Moreover, the significant discount of the initial offer price to the company's historical share price (52-week high of Rs 180 per share) and the increase to the last five-day high of Rs 97.95 since the announcement of the open offer, raises the potential for a higher cash outflow for a successful transaction, indicating a further increase in debt/EBITDA leverage," it said.
Pro forma, the transaction at an acquisition price of USD 2.2 billion for the 49.9 per cent shareholding, VRL's consolidated leverage will be 6.0x at March 2020, up from 5.3x before the transaction.
"Over a longer-term, the simplification of the group structure and the reduction in cash leakage while extracting dividends could lead to a faster pace of deleveraging," it said.
VRL's liquidity, Moody's said, is weak, especially at the holding company (Holdco) with USD 1.8 billion debt maturing until September 2021, including a USD 670 million US dollar bond due in June 2021.
Widening yields, falling bond prices, and tight capital market liquidity have heightened refinancing risk.
And, the proposed privatisation debt, in short-term, will further weaken the holding company's liquidity.
As of September 2019, almost 46 per cent of the consolidated reported debt was held at the holding company, with the balance at Vedanta Ltd and other operating subsidiaries.
"While the proposed privatization will improve the holding company's access to cash flows at Vedanta Ltd, it does not completely alleviate the risk for Holdco creditors that remain legally and structurally subordinated to claims at the operating companies. Moreover, more than half of the group's EBITDA is generated at Vedanta Ltd's 65 per cent owned subsidiary, Hindustan Zinc Ltd," it said.
Moody's expected the company to maintain good disclosures even after Vedanta Ltd becomes a private entity.
"However, the concentrated ownership with Volcan Investments, the sole shareholder of Vedanta Resources and absence of minority shareholders at Vedanta Ltd could raise the potential for related party transactions that are not aligned with creditors," it said. "Reduced levels of disclosure or transparency for bondholders or increased incidence of related party transactions, or both, could put pressure on the company's ratings.
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