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Rating Action:

Moody's changes Vedanta's outlook to negative; affirms B2 CFR and B3 senior unsecured rating

16 Feb 2022

Singapore, February 16, 2022 -- Moody's Investors Service has affirmed Vedanta Resources Limited's (VRL) B2 corporate family rating (CFR) and the B3 rating on the senior unsecured notes issued by VRL and those issued by its wholly-owned subsidiary Vedanta Resources Finance II Plc, and guaranteed by VRL.

At the same time, Moody's has changed the outlook to negative from stable.

"The change in outlook to negative reflects holding company VRL's large near-term refinancing requirements amid tightening liquidity in the capital markets," says Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer. "The continued delay in refinancing its upcoming debt maturities with long-term funding raises concerns over the company's liquidity management, even as supportive commodity prices have improved its key financial metrics."

Moody's considers the holdco's persistently weak liquidity and high refinancing needs as signs of an aggressive risk appetite, with implications for the company's financial strategy and risk management, a key component of the rating agency's governance risk assessment framework. Today's rating action considers the impact of VRL's aggressive liquidity management and refinancing practices on its credit profile, which Moody's regards as credit negative.

The affirmation of the CFR reflects the rating agency's view that VRL's operations are solidly positioned with favorable underlying demand and commodity prices that support continued positive free cash flow generation.

RATINGS RATIONALE

Holdco VRL is about to enter its peak years of long-term debt maturities in fiscal years ending March 2023 (fiscal 2023) and March 2024, when about 60% of its total $9.4 billion debt or $5.7 billion, falls due. Moreover, $4.2 billion -- 45% of the total $9.4 billion debt -- will mature by June 2023. These debt maturities include senior unsecured notes of $1 billion in July 2022, $400 million in April 2023 and another $500 million in May 2023. Further exacerbating liquidity risk at the holdco is an annual interest bill that has climbed to around $800 million, from $500 million in previous years.

"We estimate the holdco's current cash sources -- management fee and dividends from operating subsidiaries -- will fall short of its cash needs over the 18 months until June 2023. While the company is obtaining financing for a part of its upcoming debt maturities, the absence of an executed refinancing plan keeps liquidity risk elevated, especially amid tight liquidity in capital markets and widening yields on its existing USD bonds," adds Chaubal, who is also Moody's Lead Analyst for VRL.

In November 2021, VRL acquired around 4.5% shareholding in Vedanta Limited (VDL) through an open market purchase. The entirely debt-funded stake purchase of $800 million is the company's third purchase within the last 12 months and has increased its shareholding in VDL to 69.7% as of December 2021, from 50.1% as of November 2020. The increased stake in VDL partially addresses Moody's concerns over cash leakage at VRL, given that the holdco can access the liquidity at VDL and VDL's 64.9%-owned subsidiary Hindustan Zinc Limited with lower leakage. However, a large part of the acquisition financing debt is due within the 18 months ending June 2023, straining the holdco's already fragile liquidity.

Moody's forecasts for VRL are based on the rating agency's price sensitivities for metals ($0.70-$1.00 per pound [/lb] for aluminum, $1.00-$1.30/lb for zinc, and $17-$21 per ounce for silver) and based on its medium-term Brent price assumptions of $50-$70 per barrel. However, prevailing commodity prices are substantially higher than the upper end of Moody's price sensitivities, illustrating significant upside potential to its consolidated adjusted EBITDA estimate for VRL of $6.0 billion-$6.3 billion for fiscal 2023. Based on these estimates, VRL's leverage, as measured by debt/EBITDA, should track slightly below 3.0x over the next 12-18 months, as it progressively improves from 4.6x as of March 2021 and 3.3x as of September 2021.

While these leverage levels are low for its ratings, based on a pro rata consolidation of debt and EBITDA in proportion to VRL's shareholding in its subsidiaries, leverage was 6.4x as of March 2021 and 4.6x as of September 2021, which is more in line with Moody's expectations for the B2 CFR.

The B2 CFR continues to reflect the company's core credit strengths, such as its (1) large-scale and diversified low-cost operations; (2) exposure to a wide range of commodities such as zinc, aluminum, iron ore, oil and gas, and power; (3) strong position in key markets, with an ability to command a price premium; (4) history of relative margin stability through commodity cycles; and (5) sustained improvement in its credit metrics.

The senior unsecured notes issued by/guaranteed by VRL are rated B3, one notch lower than the B2 CFR, reflecting noteholders' subordination to creditors at VRL's operating subsidiaries.

The ranking among the various holdco creditors is differentiated. About US$3.3 billion (senior debt) of VRL's $9.4 billion debt as of December 2021, is raised at intermediate holding companies, with guarantees from Twinstar Holdings and Welter Holdings, which collectively hold a 47.4% stake in the key operating subsidiary, VDL. The guarantees are at the exclusion of the holdco's other debt, including Moody's-rated $3.5 billion in senior unsecured notes. Even so, Moody's views the recovery prospects for the holdco's senior unsecured debt to likely be similar to the senior debt in a distressed scenario.

The negative rating outlook reflects the company's weak liquidity profile and Moody's concerns over the increased refinancing risk arising from the holdco's looming debt maturities.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could downgrade the ratings if (1) holdco VRL fails to refinance its near-term US dollar bond and loan maturities with long-term financing by April 2022; (2) VRL pursues aggressive financial policies, in particular large debt-funded investments that materially skew its financial profile; (3) there is exposure to VRL's ultimate shareholder, Volcan Investments, other than through modest dividends; or (4) an adverse ruling on any of the company's pending lawsuits that results in large cash outflows.

While commodity prices are unlikely to decline significantly over the next 12 months, downward ratings pressure could also emerge if commodity prices soften and reduce VRL's EBITDA and free cash flow generation, causing a sustained weakening in credit metrics, such as leverage above 5.0x, EBIT/interest coverage below 1.25x, or cash flow from operations less dividends/debt below 10%.

In addition, downward pressure on VRL's senior unsecured B3 ratings could also emerge if the company is unable to sustain recent reductions in the level of priority claims ranking ahead of the holdco's senior unsecured debt. While Moody's expects that there may be some volatility in the ratio of priority claims to total claims, a sustained deterioration in this metric toward historical levels would likely cause the rating agency to widen the difference between the CFR and the senior unsecured notes' rating to two notches.

An upgrade is unlikely, given the acute refinancing and liquidity risk at the holdco. However, the outlook could return to stable if the holdco secures sufficient funding to completely address its upcoming debt maturities and ensure comfortable liquidity. More importantly, VRL will need to demonstrate prudent financial and risk management strategies, including a sustained approach to proactive refinancing and liquidity management at the holdco, for the outlook to return to stable.

The principal methodology used in these ratings was Mining published in October 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1292752. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Vedanta Resources Limited (VRL), headquartered in London, is a diversified resources company with interests mainly in India. Its main operations are held by Vedanta Limited (VDL), a 69.7%-owned subsidiary. Through its various operating subsidiaries, the group mainly produces oil and gas, zinc, lead, silver, aluminum, iron ore and power. VRL is wholly owned by Volcan Investments Ltd, whose key shareholders are founder chairman, Anil Agarwal, and his family.

For the 12 months ended 30 December 2021, VDL generated consolidated revenue of $16.0 billion and EBITDA of $5.5 billion.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Kaustubh Chaubal
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Ian Lewis
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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