Fitch Co Raises Concerns Regarding Vedanta Demerger

12 Apr 2024 , 02:51 PM

Vedanta’s proposed demerger, in which its debt is to be divided among the six demerged firms based on their different book asset valuations, has prompted concerns regarding the specific debt allocated to each entity.

Bondholders of Vedanta Resources (VRL), the parent company of Mumbai-listed Vedanta, are concerned about the security of the Indian entity’s shares, according to a research by Fitch Group subsidiary CreditSights.

In September 2023, the mining giant revealed intentions to divide five of its major operations – aluminium, oil and gas, and steel – into separate listed organisations.

While Vedanta has stated that it goals to value the assets of its demerged entities based on their book values, CreditSights believes that this is a relatively simple approach because book values are captured at a specific point in time, and “carrying values may be outdated, and may not accurately reflect future profitability and cash flow generation of the business.”

Previously, CreditSights stated that the planned demerger of its other businesses might attract significant opposition from minority shareholders and/or creditors, potentially delaying or derailing the deal.

There is confusion regarding how Vedanta would pick and distribute specific debt to which organisation, and the same goes for its secured rupee bonds issued at the business level. “For VRL’s dollar bondholders, the main concern will be what happens to their security over Vedanta’s shares,” according to the news release.

The slight benefits observed for investors in VRL’s dollar bonds include enhanced equity price determination for separate businesses, the possibility of increased value through equity listing, and the potential for cash proceeds from stake sales, which could be utilized to reduce VRL’s debt.

VRL bonds have gained since the restructuring of dollar obligations in January of this year, but CreditSights sees limited upside in bond prices and anticipates funding availability to remain constricted and the interest burden to remain high. Vedanta is still experiencing financing shortages of $850 million and $1.4 billion for FY25 and FY26, respectively.

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