Moody's assigns B3 rating with negative outlook to Vedanta's USD notes

Though the notes will carry security in the form of a pledge on shares, Moody's does not view their position to be superior to the secured and unsecured debt at various operating companies

Moody's Investors Service has assigned a B3 rating to the proposed USD notes to be issued by Vedanta Holdings Mauritius II Limited, a wholly-owned, step-down subsidiary of Vedanta Resources Limited (VRL).

The outlook on the rating is negative. VRL is in the process of fully privatising its key operating subsidiary, Vedanta Limited (VDL), by increasing its stake to 100 per cent from 50.1 per cent and delisting the company.

"The proposed notes are rated at the same level as the existing senior unsecured notes issued by VRL, as well as those issued by VRL's wholly-owned subsidiary, Vedanta Resources Finance II Plc, and guaranteed by VRL. These USD bonds are rated two notches lower than the company's corporate family rating (CFR), reflecting the complex group structure, with VRL having less than 100 per cent ownership in key operating companies and bondholders' legal and structural subordination to claims at the operating company level," the release quoted Kaustubh Chaubal, Moody's vice president and senior credit officer as saying.

"Additionally, the privatisation of VDL will not completely alleviate risk for creditors of the holding company, who remain legally and structurally subordinated to claims at the operating companies," said Chaubal.

The proposed notes will also carry security in the form of a pledge on the shares of Vedanta Holdings Mauritius II Limited and VHML. Despite this, Moody's does not view their position to be superior to the secured and unsecured debt at various operating companies.

The proceeds from the proposed notes would be held in an escrow for the sole purpose of increasing VRL's stake in VDL from the current 50.1 percent by acquiring up to 49.9 percent of the remaining stake through Vedanta Holdings Mauritius II Limited and VHML.

The transaction, which has been approved by the shareholders of both companies, now awaits price discovery through a reverse book building process. Upon price discovery, VRL will retain the option to execute the transaction and delist VDL.

Should the privatization and delisting transaction fall through, proceeds from the proposed notes will be redeemed, said Moody’s.

Moody's views the privatisation as credit positive and a major step in simplifying the complex group structure of VRL, whose less than 100 percent ownership in its operating subsidiaries has historically hindered its credit profile.

The privatization will enable VRL to better access future cash surpluses, as well as cash of around $1.7 billion held at VDL and its wholly-owned subsidiary, Cairn India Holdings Limited. It will also improve VRL's cash access and ability to allocate assets and liabilities across the group.

The remaining 49.9 per cent stake in VDL was valued at $2.8 billion after price per share closed at Rs 125.25 on 10 August. VRL plans to fund the privatisation  transaction from the bond proceeds and a bridge finance facility with a three month maturity.

Moody's expects the company's consolidated leverage will rise to 6x in March 2020, up from 5.0x before the transaction. However, immediately following the privatisation, Moody's expects the company to reduce its debt by at least $2.0 billion, keeping its consolidated leverage around the 5.0x mark.

Additionally, although the acquisition of the remaining stake in VDL is credit positive and will simplify VRL's complex shareholding structure, one key operating subsidiary, Hindustan Zinc (HZL), will still remain a stepdown subsidiary, with VRL owning a stake of 64.9 per cent.