Moody's downgrades Vedanta's CFR to B1 and senior unsecured notes to B3; outlook stable

Moody's points out that the low and volatile commodity price environment will mean that Vedanta's earnings will unlikely improve significantly.

Mar 04, 2020 02:03 IST India Infoline News Service

Moody's Investors Service has downgraded Vedanta Resources Limited's (Vedanta) corporate family rating (CFR) to B1 from Ba3.

Moody's has also downgraded the rating on senior unsecured bonds issued by Vedanta and those issued by its wholly-owned subsidiary, Vedanta Resources Finance II Plc and guaranteed by Vedanta, to B3 from B2.

The outlook on all ratings is stable.

Ratings Rationale
"Today's downgrade of Vedanta's ratings was triggered by a sustained deterioration in the company's credit profile, and our expectation that its credit metrics will remain weak for the previous ratings," says Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer.

In particular, Moody's expects that over the next 12 months, Vedanta's credit metrics will breach Moody's downgrade triggers for its previous Ba3 rating of debt/EBITDA leverage above 4.0, EBIT/interest below 2.5x, and cash flow from operations less dividends/adjusted debt below 15%.

Moody's points out that the low and volatile commodity price environment will mean that Vedanta's earnings will unlikely to improve significantly. Consequently, the company's financial profile will take longer than anticipated to strengthen.

Based on the mid-to-low end of Moody's price sensitivities for base metals and oil, Vedanta's leverage (including interest-bearing acceptances treated as debt) will likely register in the 4.0x -6.0x range and EBIT/interest coverage at less than 2.0x, even as various cost rationalization efforts continue to strengthen the company's position along the cost curve.

The rating actions also reflect Moody's revised view on the treatment of the loan raised in 2018 by Vedanta's sole shareholder, Volcan Investments, for Vedanta's privatization.

Moody's earlier analytical approach to assessing Vedanta's credit strength was based on the separation of Vedanta and its operating subsidiaries from its shareholder, and Moody's expectation that Volcan will not require Vedanta to service any of its debt obligations.

"However, we now expect Vedanta to pay an additional dividend towards meeting Volcan's upcoming debt maturity," adds Chaubal, who is also Moody's Lead Analyst on Vedanta. "While we note that the additional dividend will be adjusted towards reducing dividend payments in the next fiscal year, it blurs the separation between the two companies."

Moody's estimates that the overall impact of adding Volcan's debt and trade acceptances treated as debt on Vedanta's leverage to be around 0.5x.

The B1 CFR is supported by Vedanta's large scale and diversified low-cost operations that produce a wide range of commodities such as zinc, oil and gas, aluminum, iron ore and power. Also, the company's strong position in key markets that enable it to command pricing premium and track record of generating stable margins through commodity cycles support its business profile and are key credit strengths.

The B3 rating on the senior unsecured notes issued/guaranteed by the holding company is two notches lower than the CFR and reflects the bondholders' acute legal and structural subordination risk relative to operating company creditors.

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