New Delhi: US-based Moody’s Investors Service on Monday said it has upgraded Vedanta Resources’s corporate family rating (CFR) to Ba3 from B1.
Moody’s corporate family ratings are opinions of a corporate family’s ability to honour all of its financial obligations. It has also upgraded the company’s senior unsecured bond rating to B2 from B3, the ratings agency said in a statement.
“Moody’s Investors Service has upgraded Vedanta Resources plc’s (Vedanta) corporate family rating (CFR) to Ba3 from B1," the statement said. “The upgrade of Vedanta’s ratings reflects our view that the relatively benign operating environment and stabilising commodity prices will aid in enhancing the company’s EBITDA and cash flow generation," Kaustubh Chaubal, Moody’s vice president and senior analyst said.
The upgrade also reflects the significant progress that Vedanta has made in reducing absolute debt levels following the merger of its subsidiary Vedanta Ltd with the group’s oil and gas subsidiary Cairn India Ltd (CIL). The company has reduced about 17% of its gross debt, Chaubal, Moody’s lead analyst on Vedanta, added.
Moody’s expects a further reduction in gross debt and improvement in earnings. Meanwhile, higher sales volumes led by an increase in production will pave the way for earnings and cash flow expansion, although annual capital expenditure aggregating $1.2-1.5 billion and dividend payments will likely limit free cash flow generation.
“Vedanta’s unsecured bond issuances in January and August this year each totalling USD 1.0 billion and a USD 840 million term loan for refinancing constitute proactive steps towards refinancing its debt maturities and lengthening the age profile of its debt," Moody’s said.
Moody’s expects the current operating environment and the company’s track record in turning around its operations will help in Vedanta Plc’s ability to refinance the term debt — largely owed to relationship banks — aggregating $1.2 billion due over the next 16 months.
The Ba3 CFR, Moody’s said, also takes into account “Vedanta’s large scale, diversified business profile, as reflected by its presence in the copper, zinc, aluminium, iron ore, oil and gas, and power businesses across multiple geographies and track record of relative margin stability through commodity cycles."
Moody’s further said it “rates the senior unsecured bonds issued by the holding company Vedanta Resources Plc at B2 — two notches lower than the company’s CFR to reflect the bondholders’ relatively weak position against the creditors of operating subsidiaries.
“The two-notch difference reflects the acute legal and structural subordination of holding company debt holders to the rest of the group, due to a highly complex group structure with less than 100 per cent shareholding in key operating subsidiaries".
The agency said the stable rating outlook Moody’s view that Vedanta’s operating and financial metrics will continue to steadily improve with stable commodity prices. In particular, Moody’s expects that its earnings expansion and a permanent reduction in gross debt will increase the pace of correction in the company’s leverage.