Moody’s downgrades Vedanta Resources’ CFR to Caa2; outlook remains negative

Moody’s has also downgraded to Caa3 from Caa2 its rating on the senior unsecured bonds issued by Vedanta Resources and those issued by Vedanta Resources’s wholly owned subsidiary, Vedanta Resources Finance II Plc, and guaranteed by Vedanta Resources.

Moody’s Investors Service defines a Caa3 rating as one judged to be highly speculative and with the likelihood of being near or in default but some possibility of recovering principal and interest. A Caa2 rating is within speculative grade and is judged to be of poor standing and subject to very high credit risk.

“The downgrade reflects elevated risk of debt restructuring over the next few months because VRL has not made any meaningful progress on refinancing its upcoming debt maturities, in particular the $1 billion bonds maturing each in January 2024 and August 2024,” says Kaustubh Chaubal, a Moody’s Senior Vice President and lead analyst on VRL.

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“VRL’s consolidated debt/EBITDA leverage was 3.7x as of March 2023 – substantially strong for its Caa category CFR. Still, the company continues to face challenges in refinancing its debt, a reflection of reduced appetite from the lending community, and a key credit concern,” Moody’s said in its note.

Moody’s said VRL sold a 4.3 per cent stake in August 2023 in key subsidiary Vedanta Limited (VDL) for around $500 million to stave off some of the pressure arising from the holdco’s imminent cash needs.

Given that its entire shareholding in VDL and that VDL’s entire 64.9 per cent shareholding in Hindustan Zinc Limited (HZL), which holds around two-thirds of the group’s consolidated cash, have already been pledged, this implies VRL has limited financial flexibility to raise financing.

The negative outlook reflects VRL’s persistently weak liquidity profile and Moody’s concerns over the company’s ability to address the imminent cash needs, especially at the holdco, Moody’s said.

Earlier this year, Moody’s had downgraded Vedanta Resources’ corporate family rating (CFR) to Caa1 from B3. It had also downgraded the ratings to Caa2 from Caa1 on the senior unsecured bonds issued by VRL. The rating agency had highlighted that holdco VRL has paid down around $2.0 billion of its debt during fiscal 2023.

However, the agency considers that maintaining liquidity and proactive liability management are more pertinent in preserving VRL’s credit quality, as opposed to debt reduction, given its Moody’s-adjusted consolidated gross debt/EBITDA remains around 4.0x, comfortably below the previous downgrade trigger of 5.5x.

On Tuesday, shares of Vedanta settled 0.27 per cent at ₹224.05 apiece on the BSE.

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Updated: 26 Sep 2023, 05:32 PM IST