Moody's Changes Vedanta's Outlook From Stable To Negative

Moody's Investors Service on Wednesday said it has changed its outlook on Vedanta Resources Ltd to 'negative' from 'stable', owing to its largest near-term refinancing requirement amid tightening liquidity in the capital markets.

The rating agency affirmed Vedanta Resources Ltd's (VRL) B2 corporate family rating (CFR) and the B3 rating on the senior unsecured notes issued by VRL and those issued by its wholly-owned subsidiary Vedanta Resources Finance II Plc and guaranteed by VRL.

At the same time, Moody's has changed the outlook to 'negative' from 'stable'.

"The change in outlook to negative reflects holding company VRL's large near-term refinancing requirements amid tightening liquidity in the capital markets," said Kaustubh Chaubal, vice-president and senior credit officer of Moody's. "The continued delay in refinancing its upcoming debt maturities with long-term funding raises concerns over the company's liquidity management, even as supportive commodity prices have improved its key financial metrics," he added. 

Moody's said it considers the holding company's persistently weak liquidity and high refinancing needs as signs of an aggressive risk appetite, with implications for the company's financial strategy and risk management.

"Today's rating action considers the impact of VRL's aggressive liquidity management and refinancing practices on its credit profile, which Moody's regards as credit negative," the rating agency said in a statement.

The affirmation of the CFR reflects the rating agency's view that VRL's operations are solidly positioned with favourable underlying demand and commodity prices that support continued positive free cash flow generation, it said.

Holding company VRL is about to enter its peak years of long-term debt maturities in fiscal years ending March 2023 (fiscal 2023) and March 2024, when about 60 per cent of its total $9.4 billion debt or $5.7 billion, falls due. Moreover, $4.2 billion -- 45 per cent of the total $9.4 billion debt -- will mature by June 2023.

These debt maturities include senior unsecured notes of $1 billion in July 2022, $400 million in April 2023 and another $500 million in May 2023.

Further exacerbating liquidity risk at the holding company (holdco) is an annual interest bill that has climbed to around $800 million, from $500 million in previous years.

"We estimate the holdco's current cash sources -- management fee and dividends from operating subsidiaries -- will fall short of its cash needs over the 18 months until June 2023. While the company is obtaining financing for a part of its upcoming debt maturities, the absence of an executed refinancing plan keeps liquidity risk elevated, especially amid tight liquidity in capital markets and widening yields on its existing USD bonds," Chaubal, who is also Moody's lead analyst for VRL, said.

In November 2021, VRL acquired around 4.5 per cent shareholding in Vedanta Ltd (VDL) through open market purchase. The entirely debt-funded stake purchase of $800 million is the company's third purchase within the last 12 months and has increased its shareholding in VDL to 69.7 per cent as of December 2021, from 50.1 per cent as of November 2020.

The increased stake in VDL partially addresses Moody's concerns over cash leakage at VRL, given that the holdco can access the liquidity at VDL and VDL's 64.9 percent-owned subsidiary Hindustan Zinc Limited with lower leakage. However, a large part of the acquisition financing debt is due within the 18 months ending June 2023, straining the holdco's already fragile liquidity, the rating agency said.

"The B2 CFR continues to reflect the company's core credit strengths, such as its large-scale and diversified low-cost operations; exposure to a wide range of commodities such as zinc, aluminium, iron ore, oil and gas, and power; strong position in key markets, with an ability to command a price premium; history of relative margin stability through commodity cycles; and sustained improvement in its credit metrics," Moody's said.

About $3.3 billion (senior debt) of VRL's $9.4 billion debt as of December 2021 is raised at intermediate holding companies, with guarantees from Twinstar Holdings and Welter Holdings, which collectively hold a 47.4 per cent stake in the key operating subsidiary, VDL.

"The negative rating outlook reflects the company's weak liquidity profile and Moody's concerns over the increased refinancing risk arising from the holdco's looming debt maturities," the statement said.

Moody's said it could downgrade the ratings if holdco VRL fails to refinance its near-term US dollar bond and loan maturities with long-term financing by April 2022. The same will happen in case VRL pursues aggressive financial policies, in particular large debt-funded investments that materially skew its financial profile.

"An upgrade is unlikely, given the acute refinancing and liquidity risk at the holdco. However, the outlook could return to stable if the holdco secures sufficient funding to completely address its upcoming debt maturities and ensure comfortable liquidity," Moody's said. "More importantly, VRL will need to demonstrate prudent financial and risk management strategies, including a sustained approach to proactive refinancing and liquidity management at the holdco, for the outlook to return to stable."

VRL, headquartered in London, is a diversified resources company with interests mainly in India. Its main operations are held by VDL, a 69.7 percent-owned subsidiary. Through its various operating subsidiaries, the group mainly produces oil and gas, zinc, lead, silver, aluminium, iron ore and power. VRL is wholly owned by Volcan Investments Ltd, whose key shareholders are founder chairman, Anil Agarwal, and his family.

For the 12 months ended December 30, 2021, VDL generated consolidated revenue of $16 billion and EBITDA (earnings before interest, tax, depreciation and amortisation) of $5.5 billion.