Singapore, December 03, 2020 -- Moody's Investors Service has downgraded the corporate family rating
(CFR) of Vedanta Resources Limited (VRL) to B2 from B1. Moody's
has also downgraded the ratings on the senior unsecured bonds issued by
VRL and those issued by Vedanta Resources Finance II Plc (VRF) and guaranteed
by VRL to Caa1 from B3.
All ratings remain under review for further downgrade.
"The downgrade primarily reflects the holding company VRL's
persistently weak liquidity and high refinancing needs amid growing 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," says Kaustubh Chaubal a Moody's
Vice President and Senior Credit Officer.
Today's rating action also considers the impact of the company's
governance practices on its credit profile, which Moody's
regard as credit negative.
RATINGS RATIONALE
Holdco VRL's liquidity is severely challenged with $2.8
billion of its debt maturing from January 2021 through June 2022,
including intercompany debt maturities of $507 million and a $325
million debt maturity at VRL's sole shareholder Volcan Investments,
which Moody's expects to be serviced out of VRL group cash flows.
Further weakening the holdco's liquidity is an estimated $470
million of annual interest expense. And following the upstreaming
of the intercompany loan from Cairn India Holdings Limited (CIHL) earlier
this fiscal year and VDL's commitment to investors that no further
intercompany loans will be extended without approval from the VDL board,
cash movement options from operating subsidiaries to the holdcos may be
restricted to dividends and a nominal management/branding fee from its
operating subsidiaries. However, Moody's cautions that
the group's complex structure with less than 100% shareholding
in key operating and cash rich subsidiaries, restricts the amounts
of such dividends.
"VRL's funding access had been underpinned by continued support
from Indian and multinational banks not only at the operating entities,
but also at various holding companies," adds Chaubal,
who is also Moody's Lead Analyst for VRL. "However,
VRL had to repay its $425 million debt maturity from one of its
relationship banks, as opposed to rolling it over or refinancing
it with other long-term debt, a sign of reduced bank support."
On 20 November, VRL announced it had appointed a top-15 accountancy
firm, MHA Maclntyre Hudson as its statutory auditors for the fiscal
year ending 31 March 2021 (fiscal 2021) following Ernst & Young's
-- the company's former statutory auditors --
decision not to be reappointed as auditors. Ernst & Young were
statutory auditors of VRL for the fiscal years 2017 through 2020 and had
issued a qualified audit report for fiscal 2020. However,
the exiting auditor has confirmed that there were no reasons or matters
that need to be brought to the attention of the members/creditors of the
company in connection with them ceasing to hold office.
S R Batliboi & Co and other Ernst and Young member firms continue
as statutory auditors of VRL's 50.1% owned subsidiary
Vedanta Limited (VDL) and its subsidiaries. However, VDL's
unaudited interim financial statements for fiscal 2021 also contain a
qualified conclusion from the auditors pertaining to the $956 million
intercompany loan from VDL's wholly owned subsidiary CIHL to holdco
VRL.
Earlier in November, VDL announced that one of its independent directors
resigned for personal reasons, marking the fourth senior departure
in 2020. Departures in the senior management/board at such frequent
intervals can be alarming, especially at a time when the company's
liquidity is weak, statutory auditors opt not to be reelected and
are providing qualified reports and qualified conclusions.
Further adding pressure to VRL's credit profile is an accident in
November at one of its mines in Gamsberg, South Africa, where
mining activity remains suspended due to a geotechnical failure.
The geotechnical failure trapped 10 of the company's employees,
killing two. With 108,000 tons of zinc production in fiscal
2020, the Gamsberg mine is relatively small and the suspension in
its mining is unlikely to meaningfully dent VRL's consolidated earnings
or cash flow generation. Even so, the accident underscores
social risks, with plausible implications for the company's
globally diversified mining operations.
Meanwhile, VDL's operations continued to improve steadily with performance
in the second quarter of the fiscal year ending March 2021 (Q2 fiscal
2021) significantly higher than Q1 fiscal 2021. More importantly,
against consolidated revenues and operating EBITDA of $4.9
billion and $1.6 billion respectively in H1 fiscal 2021,
Moody's expects VDL to achieve consolidated revenues of $9.5
billion - $10.0 billion and consolidated EBITDA of
$3.5 billion - $3.6 billion in full
year fiscal 2021. With these operating metrics, Moody's expects
VRL's consolidated adjusted debt/EBITDA leverage at March 2021 to marginally
improve to less than 5.0x from around 5.5x in September
2020 and 5.3x in March 2020.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's expects to conclude the review within 90 days. The
ratings review will focus on VRL's ability to refinance its upcoming
debt maturities in a timely manner with long-term debt.
An upgrade is unlikely, given the review for downgrade. However,
Moody's could conclude its review for downgrade and confirm all
ratings if VRL successfully simplifies its complex group structure and
refinances its upcoming debt maturities, in particular its bank
loans, with long-term debt and also addresses the $670
million maturity of the June 2021 notes.
The ratings could be downgraded if the company fails to secure a firm
refinancing plan, if there are further signs of reduced bank support,
or if the company undertakes a large debt-financed acquisition
without any immediate and meaningful impact on earnings.
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 fiscal year ending 31 March 2020, Vedanta Resources generated
revenues 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.
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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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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.
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