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Mar 30, 2012, 07.51 PM IST | Source: Moneycontrol.com

Vedanta's intended GoI stake buy to cut refinancing risks

Vedanta Resources Plc's proposed USD3.4bn purchase of the Government of India's (GoI) shares in Hindustan Zinc Ltd (HZL, 29.5%) and Bharat Aluminium Company Ltd (Balco, 49%) could reduce refinancing risks, says Fitch Ratings.

Vedanta Resources Plc's proposed USD3.4bn purchase of the Government of India's (GoI) shares in Hindustan Zinc Ltd (HZL, 29.5%) and Bharat Aluminium Company Ltd (Balco, 49%) could reduce refinancing risks, says Fitch Ratings.

Fitch notes that additional funding for the GoI stake acquisition will increase consolidated net financial leverage but expects it to remain within the negative rating guideline of 2.75x, thus limiting any impact on Vedanta's Long-Term Foreign Currency Issuer Default Rating (LTFC IDR) of 'BB+'.

The stake purchase will consolidate the holding structure (Vedanta currently through its 58.2% holding in Sterlite Industries Ltd has a 64.9% stake in HZL and 51% stake in Balco) and enhance Vedanta's liquidity, in particular, by enabling full access to HZL's large cash balance (around USD3bn at end-December 2011) and free cash flows (FY11: USD619m).

This, together with Vedanta's previously announced proposed reorganisation, in turn could reduce structural subordination of its senior unsecured bonds and potentially benefit the 'BB' rating of the bonds. Vedanta's senior unsecured bonds are currently rated a notch lower than the issuer's LTFC IDR due to structural subordination arising from its separation from operational cash flows, fragmented shareholding and high debt to be serviced at Vedanta.

Vedanta had USD9.7bn debt on a stand-alone basis at end-2011. The extent of the benefit would need to be evaluated, once the proposed reorganisation is completed by end-2012, in conjunction with the residual subordination of Vedanta's debt to the debt at the new operating entity, Sesa Sterlite, and the ability of the new entity to upstream cash to Vedanta. The latter remains untested given restrictions on capital account convertibility.

In 9MFY12, Vedanta's (excluding Cairn) revenue was USD9.8bn and EBITDA was USD2.4bn. HZL contributed a significant proportion, with revenue of USD1.7bn and EBITDA of USD923m. With minimal capex requirements at HZL, Fitch expects a large part of the EBITDA to translate into free cash flow for the company.

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