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June 6 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has downgraded India-based Vedanta Resources Plc’s (Vedanta) Long-Term Issuer Default Rating (IDR) to ‘BB’ from ‘BB+'. The Outlook is Stable. The agency has also downgraded Vedanta’s senior unsecured ratings to ‘BB-’ from ‘BB’. A full list of rating actions is at the end of this commentary.
Fitch has subsequently withdrawn the ratings as Vedanta has chosen to stop participating in the rating process. Therefore, Fitch will no longer have sufficient information to maintain the ratings. Accordingly, Fitch will no longer provide ratings or analytical coverage for Vedanta.
The downgrade follows a revision in the agency’s approach in rating Vedanta and resolves the Watch Negative that was placed on the rating on 15 May 2014. Fitch has analysed Vedanta’s financial profile based on proportionate debt and EBITDA to better reflect the fragmented shareholding of Vedanta in its subsidiaries. The fragmented shareholding restricts the level of Vedanta’s access to the large cash balances and future cash flows from the its key operating subsidiaries - Cairn India Limited (CIL), Hindustan Zinc Limited (HZL) and Sesa Sterlite Limited (SS).
Weak Proportionate Consolidated Financial Profile: The financial profile of Vedanta is weak relative to ‘BB+’ rated peers with proportionate leverage (proportionate net debt/ proportionate EBITDA) of 5.5x as at end-March 2014. Vedanta’s consolidated net debt/ EBITDA of 1.8x does not capture the leakages of cash to minority shareholders at its subsidiaries. Most of Vedanta’s USD9bn of cash is at HZL (USD4.3bn) and CIL (USD4bn). With Vedanta’s effective holding of only 37.8% and 34.3% respectively at these entities, the effective cash available to Vedanta is likely to amount to only about one-third of the total cash in the group. While the cash available to Vedanta by way of dividends is limited, it does provide additional short-term liquidity to the group. The IDR also factors in Vedanta’s ability to access cash from SS without any leakages to the extent of the inter-company loan receivables by Vedanta (amounting to USD4.3bn as at 31 March 2014).
Weak Standalone Interest Cover: Vedanta’s standalone interest cover (from dividend and interest income) is expected to be weak at 0.72x as at end-March 2014. The interest on the inter-company loan receivables from SS and its subsidiaries and dividends from SS are not adequate to meet the company’s interest obligations. The company meets its interest obligation from the inter-company advances repaid by its group companies. This is likely to continue over the next two financial years. However, this is counterbalanced by Vedanta’s access to unutilised bank lines of USD500m and access to cash by way of dividends or intercompany loans and/or advances.
Adding to Stakes in Subsidiaries: Vedanta plans to acquire additional shares in its subsidiaries HZL and BALCO Ltd. This follows the government of India’s plan to sell its shares in these entities through an auction. Acquiring the stakes will remove the cash leakages from HZL and benefit the company in the long term, although the increase in net debt by about USD4bn (as approved by the shareholders) for the acquisition will mitigate any benefits in the near to medium term. This is reflected in Fitch’s expectation of improvement in Vedanta’s proportionate leverage to below 5x only in the financial year ending March 2016 (FY16).
Regulatory Risks Continue: Vedanta continues to face regulatory challenges primarily at its operations in India. Vedanta’s copper and iron ore mining operations improved during FY14 with commencement of its copper smelting operations and iron ore mining at its Karnataka mines. In addition, the Indian Supreme Court allowed Vedanta to start mining operations in Goa in April 2014. However, Fitch expects the process for securing other regulatory approvals relating to mining in Goa to continue impact the company in the near term. The company’s aluminium business continues to be constrained by the lack of captive mining and pending approvals for use of the group’s power project in Orissa for its aluminium business.
Low Cost Position in Key Businesses: Vedanta will continue to benefit from its strong market position, driven by long reserve life and low cost curves in some of its key businesses. The company ranks in the lowest cost quartile in the zinc, iron ore and oil businesses while it is in the second quartile of the cost curve for aluminium.
Senior Unsecured Rating: Fitch has notched down the senior secured rating from the IDR by one notch. The notching is in view of significant debt at Vedanta and non-direct recourse to the profits and assets of the producing entities under SS. Further the existence of significant prior ranking debt at Vedanta’s operational subsidiaries also limits the extent of access to the profits and assets.
A full list of rating actions follows:
Long-Term IDR downgraded to ‘BB’ from ‘BB+'; Outlook Stable. Withdrawn
Senior unsecured rating downgraded to ‘BB-’ from ‘BB’. Withdrawn
USD1.25bn senior unsecured bonds downgraded to ‘BB-’ from ‘BB’. Withdrawn
USD1.65bn senior unsecured bonds downgraded to ‘BB-’ from ‘BB’. Withdrawn
USD1.7bn senior unsecured bonds downgraded to ‘BB-’ from ‘BB’. Withdrawn
USD180m senior unsecured loan facility downgraded to ‘BB-’ from ‘BB’. Withdrawn
USD150m unsecured loan facility of Twinstar Holdings Ltd, Mauritius backed by an
unconditional, irrevocable guarantee from Vedanta downgraded to ‘BB-’ from ‘BB’. Withdrawn
USD170m senior unsecured loan facility of Valliant (Jersey) Limited backed by an unconditional, irrevocable guarantee from Vedanta downgraded to ‘BB-’ from ‘BB’. Withdrawn
USD180m senior unsecured loan facility of Vedanta Finance (Jersey) Limited backed by an unconditional, irrevocable guarantee from Vedanta downgraded to ‘BB-’ from ‘BB’. Withdrawn