Moody's downgrades Vedanta Resources' ratings from Caa1 to Caa2 due to elevated risk of debt restructuring

Ratings agency Moody's Investors Service has downgraded Vedanta Resources' corporate family rating (CFR) from Caa1 to Caa2 due to elevated risk of debt restructuring over the next few months. Moody's has also downgraded to Caa3 from Caa2 its rating on the senior unsecured bonds issued by Vedanta Resources and those issued by Vedanta Resources's wholly owned subsidiary, Vedanta Resources Finance II Plc, and guaranteed by Vedanta Resources. 

At the same time, Moody's has maintained the negative outlooks. 

It further said VRL's Caa category CFR reflects the company's unsustainable capital structure, aggressive risk appetite and weak financial management. 

As per Moody's, a Caa3 rating as one judged to be highly speculative and with the likelihood of being near or in default but some possibility of recovering principal and interest. A Caa2 rating is within speculative grade and is judged to be of poor standing and subject to very high credit risk.

It is to be noted that Vedanta Resources faces repayment of notes worth nearly $2 billion in the financial year 2025. Including these bonds, the company is facing debt repayment worth $3.6 billion in the next financial year, as per Kotak Institutional Equities. As of March 2023, Vedanta's debt/EBITDA stood at 3.7 times.

Shares of Vedanta Ltd. ended 0.2 per cent lower on Tuesday at Rs 224. The stock is near its 52-week low and has declined nearly 30 per cent so far this year.

"The downgrade reflects 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 $1 billion bonds maturing each in January 2024 and August 2024," says Kaustubh Chaubal, a Moody's Senior Vice President and lead analyst on VRL. 

"VRL's consolidated debt/EBITDA leverage was 3.7x as of March 2023 – substantially strong for its Caa category CFR. Still, the company continues to face challenges in refinancing its debt, a reflection of reduced appetite from the lending community, and a key credit concern," Moody's said in its note.

Moody's said VRL sold a 4.3 per cent stake in August 2023 in key subsidiary Vedanta Limited (VDL) for around $500 million to stave off some of the pressure arising from the holdco'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 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 holdco, Moody's said.

Last month, Twin Star Holdings, one of the promoter entity sold over 4 per cent stake in Vedanta Ltd. via block deals. Last week, the Anil Agarwal-controlled company also approved raising up to Rs 2,500 crore via Non-Convertible Debentures as part of its refinancing exercise.

In March this year, Moody's had downgraded the corporate family rating (CFR) of Vedanta Resources to Caa1 from B3 earlier over increasing refinancing risks in debt maturities. The outlook for the rating was negative.

Liquidity issues

Moody's said Vedanta's liquidity remains persistently weak with management fees and dividends from operating subsidiaries insufficient to meet its looming debt maturities.

"Liquidity at VRL's subsidiaries also remains weak. VRL's 63.8 per cent owned subsidiary VDL reported consolidated cash of Rs 142.9 billion ($1.7 billion) as of 30 June 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 holdco's cash needs," Moody's said.

Earlier it was reported that  Vedanta Resources was in advanced talks with global private credit funds including Cerberus Capital, Bain Capital, Ares SSG Capital and Davidson Kempner to syndicate a $1 billion short-term loan, which will be used for part-paying $3.2 billion of bonds maturing in 2024 and 2025.

The company is simultaneously in talks with bondholders to change repaying timelines and other terms on a sizable portion of the $3.2 billion bonds, the Economic Times reported last week. The company in its recent roadshows in Hong Kong, Singapore and London with bondholders has proposed prepaying 30 per cent of bonds upfront.

Also read: Cipla, TechM, Adani Enterprises top losers on Nifty50 as market ends lower; HDFC Bank, Reliance Industries most active stocks on September 26, 2023

Also read: Titan, Bajaj Finance, Relaxo: Saurabh Mukherjea explains when to enter, exit stocks

Also read: Vedanta shares in focus on report parent faces resistance amid bond restructuring plan