New Delhi: Credit rating agency Standard & Poor’s on Tuesday said Vedanta’s operating risk would increase if it acquires Cairn India, as the British entity would be venturing into a new line of business.
UK-based Vedanta Resources had in August 2010 announced that it would acquire as much as 60% stake in UK’s Cairn Energy’s Indian subsidiary Cairn India for up to $9.6 billion.
“Operating risk will increase for Vedanta because Cairn represents a new line of business, offsetting the benefits from diversified revenues,” Standard & Poor’s credit analyst Suzanne Smith said.
S&P said Vedanta’s organic growth plans could slow down because of increasing operating risks at some of its business segments, like copper, aluminium, and iron ore in India, because of tight environmental regulations.
“The negative outlook reflects our view of Vedanta’s sizable debt burden, its lumpy debt maturity profile over the next two years and its need to send cash upstream or refinance,” S&P said.
The negative outlook reflects increased operating risk that could slow cash flow growth.
With the acquisition of Cairn India, Vedanta Resources’ debt would increase by about $6.80 billion, Smith said, adding that the surplus cash at the India subsidiary of Vedanta would be required to be transferred to the UK parent.
“With additional holding company debt, Vedanta will need to send more cash for debt servicing upstream or depend upon continual access to banks and capital markets for refinancing,” she added.
Further, the rating agency has given a ‘BB’ rating to Vedanta’s two bank loans totalling $3.15 billion. The company will use the proceeds to finance the proposed acquisition of Cairn India.
A ‘BB’ rating means that the loan is less vulnerable in the near term, but faces major ongoing uncertainties to adverse business, financial and economic conditions.
In August last year, S&P had put Vedanta on credit watch with negative implications, following the announcement of the deal.