Delisting failure may lead to Vedanta downgrade

Moody's Investors Service on Tuesday placed Vedanta Resources Limited's rating under review for downgrade following its failed attempt to delist Indian listed subsidiary.

Moody's placed the London-based firm's B1 corporate family rating (CFR) under review for downgrade. The same action was also initiated for the B3 ratings on the senior unsecured bonds issued by Vedanta and those by its wholly-owned subsidiary Vedanta Resources Finance II Plc, and guaranteed by Vedanta, affecting USD 4.2 billion in outstanding debt.

"The ratings outlook was changed to ratings under review from negative," Moody's said in a statement.

The review, it said, follows an increase in refinancing risk and significant funding needs at the holding company level following Vedanta Resources' failure to acquire the balance shareholding in key subsidiary Vedanta Ltd that would have improved access to group cash.

On October 10, the company announced that its voluntary delisting offer -- to acquire the balance shareholding in Mumbai-listed Vedanta Ltd and then delisting it from the stock exchange -- had failed at the reverse book building stage.

The total number of shares tendered by Vedanta Ltd's public shareholders fell 7 per cent short of the mandatory minimum 90 per cent for successful delisting.

"Moody's had viewed the proposed delisting as a credit positive and a step forward in simplifying the group's complex shareholding structure, that would have allowed for better access to consolidated cash while avoiding leakage during dividend distributions.

"With the failed delisting, the holding company's liquidity risk has increased with around USD 2.9 billion in debt maturities between April 2020 and March 2022 (including a USD 120 million revolving credit facility repayable in February 2021 and USD 425 million - the remainder of Volcan's debt to privatise Vedanta Resources) and annual interest payments of USD 470 million each year," the statement said.

Moody's expected the holding company to arrange part of the required funds from intercompany loans from foreign subsidiaries, dividends from operating subsidiaries and continued refinancing.

However, falling bond prices and widening yields on the company's USD bonds cast downside risks to the holding company's ability to refinance in a timely manner.

"More importantly, in order to maintain its current ratings, Vedanta would need to secure long-term refinancing and demonstrate its continued access to financing from relationship banks, especially at the holding company," it said.

Moody's said its review will focus on the holding company's ability to refinance its upcoming debt maturities in the fiscal year ending March (fiscal 2021) and fiscal 2022.

It expects to conclude the review within 90 days.

In the first half of the fiscal 2020, Vedanta Ltd raised around USD 1.3 billion in new debt facilities by pledging its 14.82 per cent shareholding in cash-rich and profitable 64.9 per cent owned subsidiary Hindustan Zinc Ltd (HZL).

"Moody's assesses the share pledge, the holding company's persistently weak liquidity and refinancing needs as indicators of an aggressive risk appetite with implications for the company's financial strategy and risk management, a component of our governance risk assessment framework. Today's rating action considers the impact of Vedanta's governance practices on its credit profile," the statement noted.

Vedanta Resources Ltd, headquartered in London, is a diversified resources company with interests mainly in India. Its main operations are held by Vedanta Ltd, a 50.1 per cent-owned subsidiary. Through Vedanta Resources' various operating subsidiaries, the group produces oil and gas, zinc, lead, silver, aluminium, 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 March 31, 2020, Vedanta Resources generated revenues of USD 11.8 billion and adjusted EBITDA of USD 3.4 billion.

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