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PLEASE READ AND SCROLL DOWN!

 

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Related Issuers
Rating Action:

Moody's changes Vedanta's outlook to negative; affirms all ratings

04 Feb 2019

Singapore, February 04, 2019 -- Moody's Investors Service ("Moody's") has changed the outlook on Vedanta Resources Limited's (Vedanta) ratings to negative from stable.

At the same time, Moody's has affirmed the company's Ba3 corporate family rating (CFR) and the B2 rating on the senior unsecured notes.

RATINGS RATIONALE

"The rating action reflects the heightened risk of cash movement outside Vedanta, following a $561 million structured payment by the company's operating subsidiary to ultimate shareholder Volcan Investments Ltd.. As well, our expectations for underlying operating earnings have been lowered, which will lead to elevated leverage for the ratings", says Kaustubh Chaubal a Moody's Vice President and Senior Credit Officer.

"We view the related-party investment as credit negative for Vedanta and a means to fund the risk appetite of its shareholder, a clear indication of the company's willingness to deploy cash at Vedanta to support Volcan interests," says Chaubal, who is also Moody's lead analyst on Vedanta.

Moody's earlier ratings on Vedanta were based on the expectation that Volcan will not move cash from Vedanta to provide liquidity to itself. The deferred payment is therefore a clear departure from this expectation, and exacerbates the risk that Volcan will continue to use Vedanta as a financing vehicle.

On 31 January, Vedanta's 50.1%-owned subsidiary, Vedanta Ltd, announced that its wholly owned subsidiary Cairn India Holdings Limited (CIHL) made a deferred investment in a structured product issued by Volcan.

In addition to an immediate cash outflow of $208 million in December 2018 to Volcan, CIHL has committed to make deferred payments aggregating $353 million until October 2020.

As consideration for the deferred payment, Volcan had issued a structured instrument that provides CIHL with the economic interest in the upside potential of 24.71 million equity shares in Anglo American plc (AA, Baa3 positive), but this does not allow CIHL any voting rights, or even the right to receive dividends.

In 2017 Volcan acquired 271.7 million shares of AA, giving it a 19.63% shareholding in the global diversified miner. To fund the GBP3.5 billion acquisition, Volcan issued interest-bearing mandatorily exchangeable bonds (MXB), maturing in 2020.

The bonds are not callable, the principal is backed by shares in AA and dividends accrue to the bondholders. Upon maturity, if AA's share price is higher than Volcan's purchase price in 2017, 9.1% of the 271.7 million shares, or 24.71 million shares, will accrue to Volcan.

Volcan has the option to repay the GBP3.5billion loan and obtain ownership of the shares. Alternatively, the bonds can be exchanged into AA shares, at Volcan's option.

CIHL's related-party investment in Volcan's structured product gives it the economic interest in the said 24.71 million shares. The investment stipulates capital and downside protection, although Volcan's ability to deliver on that promise cannot be assessed, given no public record of its indebtedness, investments or liquidity.

Meanwhile, Vedanta's operating results for the fiscal year ending March 2019 (fiscal 2019) will be subdued, reflecting some softness in commodity prices and elevated costs, especially for its aluminum business.

With fiscal 2019 consolidated EBITDA in the $3.6 billion -$3.9 billion area, adjusted debt/EBITDA leverage will range 4.0x -- 4.3x at 31 March, exceeding the 4.0x downgrade trigger.

The negative outlook incorporates our concern that there is an increased likelihood that Vedanta may be used as a financing vehicle for Volcan.

The negative outlook also reflects Moody's view that Vedanta's credit profile will remain sensitive to movements in commodity prices that are exposed to further downside risk.

Moody's could downgrade the company's ratings if Vedanta takes on any additional exposure to Volcan, including direct or indirect upstreaming.

The CFR could also be downgraded if commodity prices weaken for an extended period such that LTM consolidated EBITDA drops below $3.5 billion despite the company's efforts in ramping up shipments and containing costs.

Key financial metrics indicative of a lower rating include adjusted debt/EITDA leverage remaining above 4.0x, EBIT/interest coverage below 2.5x, or cash flow from operations less dividends/adjusted debt below 15%, all on a sustained basis.

The ratings could also experience downward pressure if Vedanta undertakes any large debt-financed acquisition that materially skews its financial profile, or if there is an adverse ruling with respect to Cairn India Ltd's disputed $3.2 billion tax liability.

Indicators of positive ratings pressure could include adjusted debt/EBITDA in the 3.0x -- 3.3x range and EBIT/interest coverage above 3.0x, along with positive free cash flow generation, all on a sustained basis.

The principal methodology used in these ratings was Mining published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Vedanta Resources Limited, headquartered in London, is a diversified resources company with interests mainly in India. Its main operations are held by Vedanta Ltd, a 50.1%-owned subsidiary. Through Vedanta Resources' various operating subsidiaries, the group produces oil and gas, zinc, lead, silver, aluminum, iron ore and power.

Delisted from the London Stock Exchange in October 2018, Vedanta Resources is now wholly owned by Volcan Investments Ltd. Founder chairman Anil Agarwal and his family are the key shareholders of Volcan. For the 12 months ending 30 September 2018, Vedanta Resources reported revenues of $15.6 billion and operating EBITDA of $3.8 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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
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Laura Acres
MD - Corporate Finance
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

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© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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​

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