Moody's Downgrades Vedanta's Ratings On Distressed Debt Exchange

Moody's Investors Service lowered Vedanta Resources Ltd.’s (VRL) corporate family rating to Caa3 from Caa2, saying the conglomerate’s debt restructuring is a distressed exchange.

The rating agency also downgraded to Ca from Caa3 its rating on the senior unsecured bonds issued by VRL and those issued by the London-headquartered diversified resources company’s wholly owned subsidiary, Vedanta Resources Finance II Plc, and guaranteed by VRL, Moody's said in a statement.

"We view the debt restructuring as default avoidance and assess that the creditors have incurred an economic loss with respect to the original promise," said Kaustubh Chaubal, a Moody's Senior Vice President. “We consider the transaction to be a distressed exchange under our criteria, which underpins our downgrade of VRL's ratings.”

DEBT RESTRUCTURING

Moody's said last week, VRL announced that holders of its USD bonds have provided consent to the restructuring of its debt comprising a partial upfront payment of its bond maturities in 2024 and 2025 and the extension of the balance to 2027 and 2028.

Bondholders also provided their consent to amend certain financial covenants toward leverage and debt cap limits, also taking into account the proposed demerger of VRL's operations into six separate listed companies, it noted.

Moody's, which maintained the negative outlook, said the debt restructuring transaction is likely to close in January.

RATINGS RATIONALE

Moody's said as part of the restructuring, holders of the 13.875% $1 billion January 2024 notes will be paid upfront around half the principal and be issued an amended bond for the balance carrying the same coupon, due January 2027.

Meanwhile, holders of the 6.125% $951 million August 2024 notes and the 8.95% $1.2 billion March 2025 notes will receive minimal upfront cash of 6% and 16% respectively, and will be issued amortizing bonds maturing in 2028 for the remainder, carrying a coupon of 13.875%, it added.

In addition, bondholders will receive a consent fee for the restructuring, the rating agency said.

Moody's said the holding company VRL will fund about $780 million upfront cash payment from a recently obtained loan of $1.25 billion due April 2026, while the balance of the loan proceeds will be applied, in part, toward addressing some of its loan repayments.

LIQUIDITY

"Proforma the debt restructuring, holdco VRL's near-term liquidity will improve only slightly and its refinancing wall will start building up as it approaches its next bond maturity in April 2026,” said Chaubal, who is also Moody's lead analyst for VRL.

He added that a springing covenant requiring VRL to refinance its April 2026 bond maturity by December 2025, failing which all amended bonds will mature in April 2026, will keep refinancing risk elevated and the likelihood of further distressed exchanges high.

Moody's said VRL's ratings reflect the company's unsustainable capital structure characterized by high financial leverage at the holding company and its perennially weak liquidity amid a period of continued large negative free cash flow.

The rating agency believes the company will still face material liquidity issues over the upcoming 24 months and that default risk remains high.

Moody's said VRL's consolidated debt/EBITDA leverage of around 4x is substantially strong for its ratings. Still, the company continues to face challenges in refinancing its debt, and the recent debt restructuring is a key credit concern, it noted.

As of September 2023, its operating subsidiaries held $2 billion cash, down from $4.5 billion as of March 2021, according to the statement.

Moody's said the negative outlook reflects its concerns over the company's ability to address its imminent cash needs, especially at the holding company.

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