Moody’s Investors Service has downgraded the rating of Vedanta Resources Ltd because of the elevated risk of debt restructuring over the next few months, as the firm has not made progress on refinancing its upcoming debt maturities.
Moody’s said it has downgraded to Caa2 from Caa1, the corporate family rating (CFR) of Vedanta Resources Limited (VRL).
“The downgrade reflects the elevated risk of debt restructuring over the next few months because VRL has not made any meaningful progress on refinancing its upcoming debt maturities, in particular the USD 1 billion bonds maturing each in January 2024 and August 2024,” said Kaustubh Chaubal, a Moody’s Senior Vice President and lead analyst on VRL.
VRL’s credit quality is constrained by its weak liquidity because of large refinancing needs and interest expenses amid tightening financing conditions in global capital markets, the agency noted.
“The company continues to face challenges in refinancing its debt, a reflection of reduced appetite from the lending community, and a key credit concern,” the rating agency said.
“VRL’s Caa category CFR reflects the company’s unsustainable capital structure, aggressive risk appetite and weak financial management.” In August 2023, VRL sold a 4.3 per cent stake in key subsidiary Vedanta Limited (VDL) for around USD 500 million to stave off some of the pressure arising from the holding company’s imminent cash needs.
“Given that its entire shareholding in VDL and that VDL’s entire 64.9 per cent shareholding in Hindustan Zinc Limited (HZL), which holds around two-thirds of the group’s consolidated cash, have already been pledged, this implies VRL has limited financial flexibility to raise financing,” the rating agency said.
Moody’s said a softening commodity price environment will somewhat strain the ability of VRL’s operating subsidiaries to generate cash flow. More importantly, the potential for contagion risk from the holding company’s debt woes may also impair the operating subsidiaries’ ability to raise funds to distribute dividends.
“The negative outlook reflects VRL’s persistently weak liquidity profile and Moody’s concerns over the company’s ability to address the imminent cash needs, especially at the holding company,” it said.
Holding company VRL’s liquidity remains persistently weak, with management fees and dividends from operating subsidiaries insufficient to meet its looming debt maturities, it said.
Liquidity at VRL’s subsidiaries also remains weak.
VRL’s 63.8 per cent owned subsidiary VDL reported consolidated cash of Rs 14,290 crore (USD 1.7 billion) as of June 30, 2023.
“VDL’s consolidated cash and expected cash flow from operations will be insufficient to meet capital expenditure, its own debt-servicing requirements and the large dividends to address the holding company’s cash needs,” it added.
Vedanta Resources Limited (VRL), headquartered in London, is a diversified resources company, with interests mainly in India. Its main operations are held by Vedanta Limited (VDL), a 63.8 per cent-owned subsidiary. Through VRL’s various operating subsidiaries, the group produces oil and gas, zinc, lead, silver, aluminium, iron ore, steel and power.
Delisted from the London Stock Exchange in October 2018, VRL is now wholly owned by Volcan Investments Ltd. Founder chairman of VRL, Anil Agarwal, and his family, are the key shareholders of Volcan.
For the fiscal year ending March 31, 2023, VRL generated revenues of USD 18.3 billion and adjusted EBITDA of USD 4.8 billion.