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S&P cuts Vedanta outlook to negative

October 1, 2012
Ratings agency Standard and Poor's (S&P) has affirmed non-investment grade rating to London Stock Exchange-listed Vedanta Resources and has cut its outlook to negative.

In a statement, S&P said it has affirmed 'BB' long term foreign currency corporate credit rating on Vedanta Resources, which is known as non-investment grade or speculative in the industry parlance.

"The rating on Vedanta reflects the company's exposure to commodity prices, and country and operating risks in India. Constraints include iron ore mining restrictions, time-consuming approval processes, and changes in taxes and royalties," the S&P statement said.

It quoted its Credit Analyst Vishal Kulkarni as saying that "We affirmed the rating on Vedanta to reflect our expectation that the company's oil subsidiary, Cairn India Ltd, will continue to perform strongly over the next 12 months because of favorable oil prices."

Kulkarni further said that "Cairn's contribution should offset the likely subdued cash flow generation at Vedanta's other entities due to weak metal prices and operating risks."

He also said that recent restrictions on iron ore mining in Goa could have a material impact on Vedanta's EBITDA unless they are removed and production resumes to their earlier levels over the next three months.

Besides, about $3 billion debt is maturing over the next two years, S&P said, adding that "this will test Vedanta's current ability to access the capital markets."

The global rating agency further said that reorganisation of Vedanta's Indian subsidiaries, expected to be completed by the year-end, will drop interest payments for the holding company to less than $200 million a year from more than $500 million at present.

The reorganisation, however, will keep the consolidated debt unchanged, S&P noted.

"The negative outlook on Vedanta reflects sizable and recurrent refinancing requirements at the holding company as well as its subsidiaries over the next two three years," Kulkarni said.

He added that "the negative outlook further echoes our view that the ban on iron ore mining could extend beyond the next three months."

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