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Rating Action:

Moody's downgrades Vedanta's CFR to B1 and senior unsecured notes to B3; outlook stable

03 Mar 2020

Singapore, March 03, 2020 -- Moody's Investors Service has downgraded Vedanta Resources Limited's (Vedanta) corporate family rating (CFR) to B1 from Ba3.

Moody's has also downgraded the rating on senior unsecured bonds issued by Vedanta and those issued by its wholly owned subsidiary, Vedanta Resources Finance II Plc and guaranteed by Vedanta, to B3 from B2.

The outlook on all ratings is stable.

RATINGS RATIONALE

"Today's downgrade of Vedanta's ratings was triggered by a sustained deterioration in the company's credit profile, and our expectation that its credit metrics will remain weak for the previous ratings," says Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer.

In particular, Moody's expects that over the next 12 months, Vedanta's credit metrics will breach Moody's downgrade triggers for it's previous Ba3 rating of debt/EBITDA leverage above 4.0, EBIT/interest below 2.5x, and cash flow from operations less dividends/adjusted debt below 15%.

Moody's points out that the low and volatile commodity price environment will mean that Vedanta's earnings will unlikely improve significantly. Consequently, the company's financial profile will take longer than anticipated to strengthen.

Based on the mid-to-low end of Moody's price sensitivities for base metals and oil, Vedanta's leverage (including interest bearing acceptances treated as debt) will likely register in the 4.0x -6.0x range, and EBIT/interest coverage at less than 2.0x, even as various cost rationalization efforts continue to strengthen the company's position along the cost curve.

The rating actions also reflect Moody's revised view on the treatment of the loan raised in 2018 by Vedanta's sole shareholder, Volcan Investments, for Vedanta's privatization.

Moody's earlier analytical approach to assessing Vedanta's credit strength was based on the separation of Vedanta and its operating subsidiaries from its shareholder, and Moody's expectation that Volcan will not require Vedanta to service any of its debt obligations.

"However, we now expect Vedanta to pay an additional dividend towards meeting Volcan's upcoming debt maturity," adds Chaubal, who is also Moody's Lead Analyst on Vedanta. "While we note that the additional dividend will be adjusted towards reducing dividend payments in the next fiscal year, it blurs the separation between the two companies."

Moody's estimates that the overall impact of adding Volcan's debt and trade acceptances treated as debt on Vedanta's leverage to be around 0.5x.

The B1 CFR is supported by Vedanta's large scale and diversified low-cost operations that produce a wide range of commodities such as zinc, oil and gas, aluminum, iron ore and power. In addition, the company's strong position in key markets that enable it to command pricing premium and track record of generating stable margins through commodity cycles support its business profile, and are key credit strengths.

The B3 rating on the senior unsecured notes issued/guaranteed by the holding company is two notches lower than the CFR and reflects the bondholders' acute legal and structural subordination risk relative to operating company creditors.

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 noncompliance with environmental regulation allegations.

Vedanta's concentrated ownership by Volcan 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 expected additional dividend this fiscal year 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.

LIQUIDITY

Vedanta's liquidity is weak at the holding company level. Moody's estimates the holding company held cash of less than $50 million at 31 December 2019. The holding company's cash needs until September 2021 include: (1) $1.9 billion of debt maturities, including the $670 million bond due in June 2021; (2) Volcan's entire $625 million privatization debt; and (3) interest expense of $500 million and regular dividend payments.

The holding company has a committed 364-day $120 million revolving credit facility which was entirely drawn and renewed in February 2020.

Moody's believes that the holding company will raise debt to meet its cash needs to the extent that there is a shortfall from the management fee and dividends it receives through its operating subsidiaries.

OUTLOOK

The stable outlook reflects Moody's view that Vedanta's credit profile will remain commensurate for its B1 CFR.

Vedanta has $1.9 billion of debt maturing at the holding company, which comprises the $670 million bond due in June 2021 and $1.2 billion of bank loans that have a staggered maturity.

The stable outlook incorporates Moody's expectation that Vedanta will upstream cash dividends from its operating subsidiaries to itself to repay debt and complete refinancing for the balance of the holding company debt in a timely manner. Moody's points out that a delay in completing refinancing at least 12 months prior to the relevant maturity dates will exert negative pressure on the ratings.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward ratings pressure is unlikely to build, at least over the next 12-18 months, following today's downgrade.

Nevertheless, over a longer term, Moody's could upgrade the CFR back to Ba3 if commodity prices improve and support an expansion in Vedanta's earnings and free cash flow generation; thereby helping the company reduce debt levels and strengthen credit metrics.

Financial indicators that support a Ba3 CFR include adjusted debt/EBITDA leverage below 4.0x and EBIT/interest coverage of at least 2.5x; both on a sustained basis.

But Moody's could further downgrade the CFR if commodity prices remain weak or Vedanta is unable to sustain and improve its cost reduction initiatives, such that profitability weakens, with consolidated EBIT margin falling below 15% on a sustained basis.

Leverage remaining in excess of 4.5x or EBIT/interest coverage failing to improve above 1.5x, both on a sustained basis, will be leading indicators for a downgrade of the CFR to B2.

Moody's could also downgrade the CFR if: (1) there is any 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; (2) Vedanta undertakes large debt-financed acquisitions that materially skew its financial profile; or (3) there is any adverse ruling with respect to Cairn India Limited's disputed tax liability.

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

For the 12 months to 30 September 2019, Vedanta Resources generated revenues of $13.7 billion and adjusted EBITDA of $3.3 billion.

REGULATORY DISCLOSURES

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.

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
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

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