Fitch affirms Vedanta Resources at ‘B-‘ rating with positive outlook

American credit rating agency Fitch Ratings has maintained its ‘B-‘ rating for UK-based natural resources giant Vedanta Resources Ltd (VRL), while assigning a positive outlook, indicating potential upside.

Additionally, Fitch has assigned a ‘B-‘ rating to VRL’s senior unsecured debt and the proposed $1.2 billion senior unsecured notes from its subsidiary, Vedanta Resources Finance II Plc, guaranteed by VRL, with a recovery rating of ‘RR4’.

The positive outlook highlights VRL’s improved financial flexibility and reduced debt, supported by better capital market access for refinancing. With $1.2 billion raised by September 2024 and plans to raise another $1.2 billion, VRL aims to increase the holding company’s capacity to extend debt maturities, remove restrictive covenants, lower interest costs and secure share-backed debt.

Fitch also outlined the key drivers for the assigned ratings, which are as follows:

Improved financial flexibility: VRL raised $900 million in September and $300 million in October 2024, with plans to raise another $1.2 billion to refinance $1.2 billion of bonds.

This refinancing eliminates acceleration risks, increases debt maturities, increases the debt ceiling from $3 billion to $4 billion, and reduces interest expense by $45-50 million annually.

Strong financial structure: VRL’s external holdco debt (excluding Konkola Copper Mines) has come down from $9 billion to $5 billion in FY22 due to higher dividends and stake sales. Recent refinancing has improved debt maturity terms and strengthened the financial framework.

Medium-term refinancing risks: VRL faces $3.1 billion in debt and interest obligations as of 1QFY27. Fitch expects half to be covered by brand fees and dividends, with the rest to be met through refinancing, stake sales and other actions. While this is deemed appropriate, implementation risks remain.

High Interest Burden: A weighted average interest rate of 12% and poor coverage below 2.0x for the next 18 months increase VRL’s refinancing risks, especially in adverse market conditions, until the high-cost debt with restrictive clauses is repaid. .

ESG Concerns: Governance is weak with a small board at VRL and family dominance at Vedanta Ltd, increasing the risk of cash leakage. VRL’s complex structure, with upstream guarantees and cross-jurisdictional subsidiaries, adds to the operational challenges.

Diversified but cyclical performance: VRL benefits from commodity diversification into zinc, aluminum and oil & gas but faces cyclicalities in prices. Its low-cost Indian zinc mining assets provide a competitive edge, although its reserve life is modest at 10.5 years.

Further, Fitch’s recovery analysis assumes that VRL’s 56% stake in Vedanta Ltd (VLTD) will be liquidated in bankruptcy, using the 25th percentile of VLTD’s 10-year market cap to reflect weak valuations. After deducting 10% for insolvency costs, the recovery rate corresponds to ‘RR2’. However, Fitch’s classification of India as Group D caps the recovery rating for VRL’s senior unsecured notes at ‘RR4’.

“We include an inter-company loan of around USD 417 million from subsidiary Cairn India Holdings Limited and a holdco debt of USD 5 billion on VRL to estimate the recovery. The assumptions result in a recovery rate corresponding to a recovery rating of ‘RR2’. However, VLTD is listed and operates primarily in India, which Fitch classifies under jurisdiction Group D, capping the recovery rating at ‘RR4’ for VRL’s proposed senior unsecured notes,” the credit rating agency said in its note.

Fitch’s rating sensitivity

Fitch identifies several key triggers that could individually or collectively lead to a downgrade in a stock:

– Lack of progress in addressing debt maturities within 18 months

– Signs of weakening liquidity, access to funds or fiscal discipline

– Significant reduction in debt with restrictive covenants

-Continuous improvement in Holdco coverage (dividend + brand fee/total interest) above 2.0x

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