S&P Global Ratings downgraded Vedanta Resources to CCC from B-, on potential bond extensions, said the rating agency’s latest report released on September 29.
The report stated that the proximity of Vedanta Resources' large bond maturity in January 2024 has increased the likelihood of the company undertaking a liability management exercise.
Meanwhile, on September 29, Vedanta Resources' subsidiary Vedanta Limited announced the creation of independent verticals through demerger of underlying companies.
Vedanta Resources has initiated talks with bondholders to help address the company's bond maturities of about $3 billion, including $1 billion in January 2024, stated the report. The agency’s analysts said that they believe Vedanta Resources remains committed to avoiding a payment default, and that they could assess such a liability management transaction to be distressed.
Also read: Vedanta announces demerger to split business into six listed entities
Vedanta Resources' limited alternate sources of funding add to downside risks, even though payment of the January bond is highly likely, they noted.
“In the absence of an immediate liability management exercise, we believe the company will be able to meet payment of the US$1 billion bond in January 2024,” the report said.
While the company has partly addressed the maturity of the bond through the sale of about 4 percent stake in subsidiary Vedanta Limited in August, the sources for the remaining funding gap, which the analysts estimated to be about US$600 million, “are not yet in place”.
“Further funds to redeem the bond could depend on events such as the transfer of general reserves to retained earnings at subsidiary Hindustan Zinc Ltd., or further asset sales,” stated the report.
Moreover, the presence of further large maturities following the January bond maturity could make liability management a preferred option, rather than paying down the January bond, it added.
The analysts said that the company’s potential bond extension would have to provide an adequate offsetting compensation for them to consider the extension as opportunistic and not distressed.
“The terms of a liability management proposal have not been finalized. We are therefore unable to determine if it would be regarded as distressed under our criteria,” they wrote.
“We would consider various factors while assessing if a transaction, if it eventuates, offers adequate compensation. These include the coupon on the new notes, and whether the coupon adequately captures the company's credit risk relative to its recent cost of funding. We would also consider factors such as any cash flow or structural subordination to new debt facilities, differences in tenor, security package, or covenants. Such an assessment is inherently qualitative and would require full transaction details to be assessed,” they added.
They said that this latest rating action reflects the high likelihood that the liability management exercise will be classified as distressed.
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