27-Sep-2023
2 mins read
Moody’s New Rating for Vedanta Resources Limited In a recent move, Moody’s Investors Service has downgraded Vedanta Resources Limited’s (VRL) corporate family rating from Caa1 to Caa2, casting shadows on VRL’s financial stability. The firm has also lowered the rating on VRL’s senior unsecured bonds and those from its wholly-owned subsidiary, Vedanta Resources Finance II Plc.
The Root of the Concern
Refinancing Issues The core reason behind this downgrade is VRL’s lacklustre approach to its impending debt maturities. As Kaustubh Chaubal, Moody’s Senior Vice President, remarked, VRL’s elevated risk of debt restructuring stems from its inactivity in refinancing the $1 billion bonds due in January and August 2024.
Analysing VRL’s Financial Health
Vedanta’s creditworthiness faces constraints owing to its precarious liquidity situation. Considerable refinancing obligations and escalated interest expenses amidst a constricting financial atmosphere in global capital markets further intensify this. With a debt/EBITDA leverage of 3.7x as of March 2023, VRL’s financial structure appears unsustainable, marked by aggressive risk tolerance and feeble financial governance.
Financial Flexibility at Stake
In a bid to mitigate some immediate cash pressures, VRL, in August 2023, parted with a 4.3% stake in its key subsidiary, Vedanta Limited, gathering around $500 million. However, with stakes in Vedanta Limited and Hindustan Zinc Limited already pledged, VRL’s hands are tied, severely hampering its ability to raise further funds.
Impact on Operating Subsidiaries
Moody’s has also sounded the alarm on the cash flow impediments faced by VRL’s operating subsidiaries, particularly in a decelerating commodity price landscape. The overarching debt woes at the holding company level could reverberate, jeopardising the subsidiaries’ fundraising and dividend distribution capacities.
Outlook Remains Negative
The negative outlook set by Moody’s accentuates VRL’s brittle liquidity scenario. The agency remains sceptical of VRL’s proficiency in managing its immediate cash needs, especially at the holding company level. Despite Vedanta Limited having reported consolidated cash of INR 142.9 billion as of June 2023, its available funds and projected operational cash flow will barely suffice to cover capital expenditures, debt obligations, and the pressing dividends for the holding company.
What Lies Ahead?
For now, Moody’s remains reluctant to elevate VRL’s ratings or even shift its outlook to stable without a marked improvement in the company’s liquidity stance. The window for an upgrade hinges on VRL’s adeptness in resolving its refinancing needs over the ensuing 12-18 months and in sculpting a durable capital structure. However, the agency hasn’t shied away from suggesting a possible further downgrade if VRL’s efforts in securing funding arrangements remain stagnant.
In sum, Vedanta Resources Limited is currently navigating a challenging financial maze. Their next moves in addressing these pressing concerns will be crucial for both their trajectory and for the broader market’s faith in their operations.