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Rating Action:

Moody's confirms Vedanta's ratings; outlook negative

28 Jul 2020

Singapore, July 28, 2020 -- Moody's Investors Service (" Moody's ") has confirmed Vedanta Resources Limited's B1 corporate family rating (CFR) and the B3 rating on the company's senior unsecured bonds.

Moody's has also confirmed the B3 rating on the senior unsecured bonds issued by the company's wholly-owned subsidiary, Vedanta Resources Finance II Plc, and guaranteed by Vedanta.

The outlook on all ratings has been changed to negative from ratings under review.

This concludes the rating review initiated on 24 March 2020.

"The confirmation of all ratings recognizes that while Vedanta's credit profile will remain stretched, reflecting the challenges brought on by the pandemic, we believe that the company's financial metrics will likely recover to levels appropriate for its current ratings in the fiscal year ending March 2022 (fiscal 2022)," says Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer. "That said, the negative outlook reflects the company's weak liquidity and sizeable upcoming refinancing needs under extremely challenging market conditions."

RATINGS RATIONALE

The ratings confirmation reflects Moody's expectation that Vedanta's leverage, as measured by adjusted debt/EBITDA, will improve to 3.5x-4.0x during fiscal 2022 after remaining about 5.0x -- 6.0x in fiscal 2021. Aside from refinancing risk, the negative outlook also indicates the risk of a downgrade if the coronavirus-driven downturn causes the volatile commodity prices to drop further, thereby posing downside risks to Moody's current expectations.

These leverage estimates are based on Moody's price-sensitivity analysis and expectation that Vedanta will reduce debt and deleverage following the privatization of Vedanta Limited. Vedanta is in the process of fully privatizing Vedanta Limited by increasing its stake to 100% from 50.1%. The transaction, which has been approved by both companies' shareholders, is now pending price discovery. At the closing price of INR112.05 per share on 27 July, the additional 49.9% stake in Vedanta Limited was valued at $2.7 billion. Vedanta plans to fund the transaction by raising new debt.

As a result, pro forma, Moody's expects that the company's consolidated leverage will rise to 6.0x in March 2020, up from 5.0x before the transaction. However, immediately following the privatization, Moody's expects the company to reduce its debt by at least $2.0 billion, keeping its consolidated leverage around the 5.0x mark.

Moody's views the privatization as credit positive and a major step in the simplification of the company's complex group structure with less than 100% ownership in operating subsidiaries, which has historically hindered its credit profile. The privatization will provide Vedanta with better access to future cash surpluses and cash of around $1.7 billion held at Vedanta Limited and its wholly-owned subsidiary, Cairn India Holdings Limited, in addition to improving its cash access and ability to allocate assets and liabilities across the group.

Vedanta's US dollar bonds, issued by/guaranteed by the holding company are rated two notches lower than the corporate family rating, reflecting the complex group structure with less than 100% shareholding in key operating companies and the bondholders' legal and structural subordination to operating company claims. The proposed privatization will not completely alleviate the risk for holding company creditors, who remain legally and structurally subordinated to claims at the operating companies.

ESG Considerations

In terms of environmental, social and governance (ESG) factors, the CFR reflects elevated environmental risk and moderate social risk associated with the company's mining and oil and gas production activities that require government approval and licenses, and historical instances of discontinued operations following alleged noncompliance with environmental regulations. Moody's also views the coronavirus pandemic as a social risk given its substantial implications for public health and safety and the subsequent impact on the company's operations.

Vedanta's concentrated ownership by Volcan Investments, its sole shareholder, raises the potential for related-party transactions that are not in the best interests of creditors. In this regard, Vedanta's related-party investment in Volcan's structured product in 2019 - although subsequently unwound - and the additional support in fiscal 2020 to repay the shareholder's scheduled debt maturity, are viewed negatively by Moody's. Moody's assessment is premised on the two transactions' materiality to the holding company.

Vedanta's planned privatization of Vedanta Limited and its subsequent delisting expose creditors to the risk of a change in disclosure practices because the requirements of publicly listed companies are different from private companies. But, given its substantial access to international capital markets, Moody's expects Vedanta will maintain good disclosures even after Vedanta Limited becomes a private entity, in adherence with the requirements outlined in its debt agreements. That said, the timing requirements with respect to these disclosures as per the debt agreements are likely to remain more relaxed in comparison with the statutory requirements for listed companies. In addition to Vedanta Resources being privatized in 2018, now Vedanta Limited will also be private, unlisted and not be under the scrutiny of minority shareholders and equity analysts.

LIQUIDITY

Vedanta's liquidity is weak. Vedanta's cash needs for the period April 2020 through September 2021 include: (1) $2.0 billion of debt maturities, including the $670 million bond due in June 2021; (2) Volcan's entire $425 million privatization debt; and (3) interest expenses of $700 million and regular dividend payments. These cash needs do not consider the acquisition finance debt Vedanta will raise to privatize Vedanta Limited. As a pure holding company with no operations of its own, Moody's believes that the holding company will raise new debt to meet its cash needs if there is a shortfall in the management fees and dividends it receives from its operating subsidiaries.

Liquidity at Vedanta's operating subsidiaries will remain weak as well, because of debt maturities aggregating $2.5 billion from April 2020 through September 2021. Moreover, Moody's expects the company to deliver on its accelerated debt reduction plan following the privatization of Vedanta Limited that would further weaken liquidity at its key subsidiaries. Owing to their operating statuses however, the operating subsidiaries should be able to continue to raise new financing thanks to their ability to offer assets as security and their proximity to operating cash flow.

OUTLOOK

The negative outlook reflects Moody's view that Vedanta's operating and financial metrics will remain sensitive to movements in commodity prices that are exposed to further downside risk. The negative outlook also reflects the acute refinancing risk associated with the company's large debt maturities.

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

From an operations perspective, rating upgrade momentum could build if commodity prices improve and support an expansion in Vedanta's earnings and free cash flow generation, thereby helping the company reduce debt and strengthen its credit metrics. Absolute debt reduction, especially at the holding company will also be key.

Financial metrics indicative of an upgrade include adjusted debt/EBITDA leverage below 4.0x and EBIT/interest coverage of at least 1.5x; both on a sustained basis.

Adherence to good and timely disclosures, even as its key subsidiary Vedanta Limited operates as a private unlisted company will be a prerequisite for a rating upgrade to Ba3.

Moody's could downgrade the CFR if commodity prices slide or if Vedanta is unable to sustain and improve its cost reduction initiatives, such that its profitability weakens, with consolidated EBIT margin falling below 12% on a sustained basis.

Leverage remaining in excess of 4.5x or EBIT/interest coverage remaining below 1.25x, both on a sustained basis, will be leading indicators for a downgrade of the CFR.

Moody's could also downgrade the CFR if: (1) Vedanta fails to refinance its debt in a timely manner; (2) there is additional exposure of Vedanta to Volcan in the form of additional dividends or upstreaming, other than towards servicing the balance of the privatization loan, which Moody's now includes for Vedanta's leverage calculations; (3) Vedanta undertakes large debt-financed acquisitions that materially skew its financial profile; or (4) there is any adverse ruling with respect to Cairn India Limited's disputed tax liability.

Reduced levels of disclosure or transparency for bond holders or increased incidence of related party transactions, or both, could also put pressure on the company's ratings.

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 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 of Vedanta Resources, Anil Agarwal, and his family, are the key shareholders of Volcan.

For the 12 months to 31 March 2020, Vedanta Resources generated estimated revenues of $11.8 billion and estinated adjusted EBITDA of $3.4 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_1133569.

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.

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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