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Rating Action:

Moody's confirms Vedanta's B2 corporate family rating, Caa1 senior unsecured notes' rating; outlook changed to negative

17 Feb 2021

Singapore, February 17, 2021 -- Moody's Investors Service has confirmed Vedanta Resources Limited's (VRL) B2 corporate family rating (CFR), as well as the Caa1 rating on the company's senior unsecured notes and on the senior unsecured notes issued by Vedanta Resources Finance II Plc and guaranteed by VRL. The outlook on all ratings has been changed to negative from ratings under review.

The rating confirmation concludes the review for downgrade on VRL's ratings from Moody's initiated on 3 December 2020, when VRL's ratings were downgraded by one notch and kept under review for further downgrade.

"The rating confirmation reflects the reduced immediate refinancing risk following VLR's fundraising and debt repayments, in particular at the holding company (holdco)," says Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer. "We now expect the holdco's cash sources will cover its debt maturities, interest and dividend payments through December 2021 as against our previous expectation of a funding shortfall in the quarter ending March 2021."

"The negative outlook primarily reflects holdco VRL's ongoing weak liquidity and challenges it faces for refinancing the holdco's upcoming significant debt maturities," adds Chaubal who is also Moody's lead analyst on VRL.

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 our governance risk assessment framework. Today's rating action also considers the impact of VRL's governance practices on its credit profile, which Moody's regards as credit negative.

RATINGS RATIONALE

Holdco VRL used the proceeds of a $1 billion USD bond issuance in December 2020 to repay debt, reducing its immediate refinancing needs. Still, the holdco has a sizeable $3.3 billion of debt maturing from April 2021 through September 2022, along with annual interest payments of $660 million. Moody's expects the remaining proceeds from the December 2020 issue, coupled with dividends from its 55.1% owned subsidiary Vedanta Limited (VDL) and VDL's cash-rich 64.9% owned subsidiary Hindustan Zinc Limited, will be sufficient to meet only around 65% of the holdco's cash needs for the 18 months till September 2022. And, there is limited evidence of recent bank support towards refinancing the holdco's upcoming debt maturities.

Strengthened investor confidence, proactive steps to simplify VRL's group structure, better market liquidity and benign commodity prices have all helped tighten its USD bond yields and support Moody's view that the holdco's funding access will improve. Even so, bond yields can be volatile and market liquidity is a function of several external factors. Therefore, VRL's continued reliance on USD bond markets for funding as opposed to bank loans is a rising risk, especially because of the relatively expensive pricing on its recent USD bond issuances; although bond yields have since tightened.

VRL's complex organizational structure -- with a less than 100% stake in key operating subsidiaries -- has been a key credit weakness. However, VRL has continued to improve its shareholding structure, including through the creeping acquisition of a 4.98% stake in key operating subsidiary VDL, and through the subsequent offer for an additional 10% stake. Upon completion, VRL's stake in VDL will increase to 65%.

While both transactions are debt-funded, which will keep debt elevated through to 31 March 2021, the simplified shareholding structure will improve holdco VRL's access to operating company cash flow while reducing leakage and strengthening the group's consolidated financial metrics to levels more in line with economic reality.

Moody's forecasts for VRL are based on the mid-points of Moody's price sensitivities for metals ($0.65-$0.80/lb for aluminum, $0.80-$1.1/lb for zinc, and $17-$21/oz for silver) and at $55 per barrel of oil for calendar year 2021 and $60 per barrel for 2022. However prevalent base metal prices are 10%-15% higher and those for silver are 30% higher than the upper end of Moody's price sensitivities, illustrating a significant upside to its consolidated adjusted EBITDA estimate for VRL of $4.2 billion-$4.5 billion for fiscal 2022. These estimates should translate into VRL's debt/EBITDA leverage tracking comfortably below 4.5x over the next 12-18 months.

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

Upward ratings pressure is limited given the negative ratings outlook. However, the outlook could be stabilized if VRL successfully increases its shareholding in VDL to at least 65%, and as a result of its improved access to operating company cash flow, reduces holdco VLR's debt.

Timely and proactive completion of refinancing at the holdco is a key prerequisite for outlook stabilization and commensurate with financial policies expected for VRL's B2 CFR. Ample evidence of continued bank support at the holdco will also be a precursor for Moody's to consider an outlook stabilization.

Over the longer term, Moody's could upgrade the ratings if commodity prices improve and VRL's EBITDA and free cash flow generation expand, in turn leading to meaningfully lower debt and leverage. Financial indicators of an upgrade include debt/EBITDA leverage below 4.5x, EBIT/interest coverage above 1.5x, and cash flow from operations less dividends/debt above 10%, all on a sustained basis.

Moody's could downgrade the ratings if falling commodity prices weaken VRL's EBITDA and free cash flow generation, in turn delaying a reduction in debt and leverage. Specifically, Moody's could downgrade the ratings if leverage stays above 5.0x, EBIT/interest coverage stays below 1.25x, or cash flow from operations less dividends/debt remains below 10%.

The ratings could also be downgraded if: (1) VRL fails to refinance its debt in a timely and proactive manner; (2) there is any additional exposure to Volcan in the form of additional dividends or upstreaming, other than toward servicing the balance of the privatization loan that Moody's includes in VRL's leverage calculations; (3) VRL undertakes any large debt-funded acquisition that materially shift its financial profile; or (4) there is an adverse ruling in any of its pending lawsuits that results in substantial cash outflows.

Moody's could increase the difference between the CFR and the bond ratings by more than two notches if VRL continues to raise senior debt at intermediate holding companies with guarantees or other securities to the exclusion of the holders of Moody's rated bonds.

The principal methodology used in these ratings was Mining published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739. Alternatively, 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 55.1%-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 of Vedanta Resources, Anil Agarwal, and his family, are the key shareholders of Volcan.

For the 12 months ended 30 September 2020, Vedanta Resources generated revenue of USD11.8 billion and adjusted EBITDA of USD3.4 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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

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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