S&P Global Ratings downgrades Vedanta parent's credit rating. Here's why
Vedanta Resources: S&P Global Ratings said Vedanta Resources' proposed liability management exercise involving three of its US dollar-denominated bonds totalling $3.2 billion is a distressed transaction under its criteria.
- Dec 14, 2023,
- Updated Dec 14, 2023 11:53 AM IST
S&P Global Ratings has downgraded the rating of Vedanta Ltd parent Vedanta Resources' long-term issuer credit rating and long-term issue ratings on the company's bonds due January 2024, August 2024, and March 2025 to 'CC' from 'CCC', saying the successful completion of a liability management exercise initiated by the Anil Agarwal-led company to extend the maturities of three of its US dollar-denominated bonds would constitute a distressed exchange.
The global rating agency said the Vedanta patent's ratings stayed on 'CreditWatch' with negative implications. This is where they were first placed on September 29 this year, it added.
The CreditWatch status, S&P's said, reflects the likelihood that it may downgrade Vedanta Resources to 'SD' (selective default) if the company completes the transaction. "We could also lower the ratings on the company's three bonds to 'D' in that event," S&O Global Ratings said.
If the UK-based commodity producer does not proceed with the transaction, S&P Ratings sees rising risks of a conventional payment default. This is because a $1 billion maturity in bonds are due on January 21, 2024, and there is limited progress on alternate repayment plans.
Also read: Vedanta parent looks to rejig $3.8 billion bond repayments; stock in focus
"At the same time, we revised the CreditWatch implications on the 'CCC' issue rating on Vedanta Resources' bond due April 2026 (which is not part of the proposed transaction) to developing from negative. This reflects the likelihood that the rating on this bond could move in either direction, depending on the outcome of the transaction on the other bonds," it said.
S&P Global Ratings said Vedanta Resources' proposed liability management exercise involving three of its US dollar-denominated bonds totalling $3.2 billion is a distressed transaction under its criteria.
As part of the exercise, the Vedanta Resources intends to address the three bond maturities using a mix of cash and new bonds. Accordingly, it will exchange about half of the January 2024 bond with new bonds maturing in January 2027, and most of the August 2024 and March 2025 bonds with new amortizing bonds maturing in December 2028.
"The likelihood of a conventional default in the absence of the transaction is high. This is because of the company's large upcoming debt maturities and weakened access to both internal cash flow and external financing. The company has about US$4.5 billion in debt maturities through March 2025. We do not consider the new terms of the proposed transaction as constituting adequate compensation to offset the lengthened maturities and new terms that are different from the original promise," it said.
S&P Global Ratings said it does not regard attributes of the transaction -- such as higher coupons on the August 2024 bond and March 2025 bonds, and certain additional structural enhancements on the bonds-- as providing adequate offsetting compensation for the extension of the maturities.
"This is because the transaction also gives priority of the sizable cash flow and proceeds from asset sales to a new US$1.25 billion private credit facility over the other creditors. As part of the transaction, the private credit facility will have priority access to brand fee payments by subsidiary Vedanta Ltd. to Vedanta Resources. While the group has securitized the brand fee payments to other lending facilities since late 2021, we believe the quantum of the brand fee and its proportion to the total cash flow available to Vedanta Resources to service debt will represent 40-50 per cent of the total cash flow at Vedanta Resources, excluding extraordinary dividends. This is up from less than 20 per cent previously," it said.
In addition, until $750 million of the private credit facility is repaid, it will have priority over extraordinary dividends that any asset sales at Vedanta Ltd could generate, S&P Global Ratings.
The Vedanta group will thereafter distribute proceeds equally between the private credit facility and bondholders until it fully repays the private credit facility.
"Furthermore, unlike numerous similar transactions globally, there are no haircuts on the principal or coupon amounts of the three bonds, indicating Vedanta Resources' willingness to pay. The new notes will have a coupon of 13.875 per cent. This results in a meaningful step-up in coupons for the August 2024 and March 2025 bonds, and, together with consent fee payments, represents an internal rate of return of about 15-16 per cent for the three bonds. This return is largely in line with that of other 'CCC' credits, rather than meaningfully higher," S&P said.
Also read: Mufti-parent Credo Brands IPO to open on December 19, check key details
S&P Global Ratings has downgraded the rating of Vedanta Ltd parent Vedanta Resources' long-term issuer credit rating and long-term issue ratings on the company's bonds due January 2024, August 2024, and March 2025 to 'CC' from 'CCC', saying the successful completion of a liability management exercise initiated by the Anil Agarwal-led company to extend the maturities of three of its US dollar-denominated bonds would constitute a distressed exchange.
The global rating agency said the Vedanta patent's ratings stayed on 'CreditWatch' with negative implications. This is where they were first placed on September 29 this year, it added.
The CreditWatch status, S&P's said, reflects the likelihood that it may downgrade Vedanta Resources to 'SD' (selective default) if the company completes the transaction. "We could also lower the ratings on the company's three bonds to 'D' in that event," S&O Global Ratings said.
If the UK-based commodity producer does not proceed with the transaction, S&P Ratings sees rising risks of a conventional payment default. This is because a $1 billion maturity in bonds are due on January 21, 2024, and there is limited progress on alternate repayment plans.
Also read: Vedanta parent looks to rejig $3.8 billion bond repayments; stock in focus
"At the same time, we revised the CreditWatch implications on the 'CCC' issue rating on Vedanta Resources' bond due April 2026 (which is not part of the proposed transaction) to developing from negative. This reflects the likelihood that the rating on this bond could move in either direction, depending on the outcome of the transaction on the other bonds," it said.
S&P Global Ratings said Vedanta Resources' proposed liability management exercise involving three of its US dollar-denominated bonds totalling $3.2 billion is a distressed transaction under its criteria.
As part of the exercise, the Vedanta Resources intends to address the three bond maturities using a mix of cash and new bonds. Accordingly, it will exchange about half of the January 2024 bond with new bonds maturing in January 2027, and most of the August 2024 and March 2025 bonds with new amortizing bonds maturing in December 2028.
"The likelihood of a conventional default in the absence of the transaction is high. This is because of the company's large upcoming debt maturities and weakened access to both internal cash flow and external financing. The company has about US$4.5 billion in debt maturities through March 2025. We do not consider the new terms of the proposed transaction as constituting adequate compensation to offset the lengthened maturities and new terms that are different from the original promise," it said.
S&P Global Ratings said it does not regard attributes of the transaction -- such as higher coupons on the August 2024 bond and March 2025 bonds, and certain additional structural enhancements on the bonds-- as providing adequate offsetting compensation for the extension of the maturities.
"This is because the transaction also gives priority of the sizable cash flow and proceeds from asset sales to a new US$1.25 billion private credit facility over the other creditors. As part of the transaction, the private credit facility will have priority access to brand fee payments by subsidiary Vedanta Ltd. to Vedanta Resources. While the group has securitized the brand fee payments to other lending facilities since late 2021, we believe the quantum of the brand fee and its proportion to the total cash flow available to Vedanta Resources to service debt will represent 40-50 per cent of the total cash flow at Vedanta Resources, excluding extraordinary dividends. This is up from less than 20 per cent previously," it said.
In addition, until $750 million of the private credit facility is repaid, it will have priority over extraordinary dividends that any asset sales at Vedanta Ltd could generate, S&P Global Ratings.
The Vedanta group will thereafter distribute proceeds equally between the private credit facility and bondholders until it fully repays the private credit facility.
"Furthermore, unlike numerous similar transactions globally, there are no haircuts on the principal or coupon amounts of the three bonds, indicating Vedanta Resources' willingness to pay. The new notes will have a coupon of 13.875 per cent. This results in a meaningful step-up in coupons for the August 2024 and March 2025 bonds, and, together with consent fee payments, represents an internal rate of return of about 15-16 per cent for the three bonds. This return is largely in line with that of other 'CCC' credits, rather than meaningfully higher," S&P said.
Also read: Mufti-parent Credo Brands IPO to open on December 19, check key details