Global ratings agency Moody’s on Monday downgraded the corporate family rating (CFR) of Vedanta Resources Limited (VRL) from “B2” to “B3”, reflecting high credit risk.
VRL’s continued low liquidity and high refinancing needs with large and impending debt maturities constitute relevant credit risk, particularly in an environment of rising inflation and higher interest rates, Moody’s said. .
Kaustubh Chaubal, senior vice president of Moody’s, said the rating action reflected growing refinancing pressure, as VRL had yet to secure funding for its large maturities due in April 2023 and Vedanta Resources Finance II Plc in May 2023.
This (arranging finance) was taking longer than Moody’s earlier expectations of completion by October 2022. The closeness of major maturities to maturity without a completed refinance well in advance indicates the aggressive liability management of VRL, he added.
The outlook on ratings remains negative.
The quantum of bond maturities was set at $900 million in the first quarter (Q1) of the year ending March 31, 2024. In addition, the holding company (holdco) VRL has loan repayments of $830 million between October 2022 and March 2023. While cash dividends may alleviate the holding company’s woes somewhat, large dividend payouts will erode the liquidity of its operating subsidiaries.
Moody’s said it continues to view the company’s unsustainable capital structure, low liquidity and poor liability management as signs of aggressive risk appetite. This has implications for the company’s financial strategy and risk management, a key part of the rating agency’s corporate governance risk assessment framework.
Moody’s estimates that holdco VRL would have reduced its gross debt by nearly $1 billion in the first half (H1) of fiscal year 2023. Nonetheless, holdco VRL has significant cash requirements over the 18-month period ranging from October 2022 to March 2024. These include debt maturities of approximately $3.8 billion, $450 million of an intercompany loan; and an annual interest bill of about $600 million.
VRL is purely a holding company with no operations. it will remain dependent on dividends from operating subsidiaries and Indian and multinational banks for funding, as cross-border capital markets are expected to remain very tight.