Moody's downgrades Vedanta's ratings

The new outlook on all ratings is negative; improvement in earnings looks distant due to low commodity prices

Global rating agency Moody's today downgraded Vedanta Resources plc's (Vedanta) corporate family rating (CFR) to "B2' from "Ba2" as improvement in the earning's looks distant due to the low commodity price environment.

Moody's has also downgraded the company's senior unsecured rating to "Caa1" from "B1".

The outlook on all ratings is negative.

Besides effect of the low commodity price environment, a slower correction in leverage metrics than initially anticipated is also driving rating says Kaustubh Chaubal, a Moody's Vice President and Senior Analyst.

The rating actions also incorporate the refinancing risk that the company faces, in particular, in relation to its debt maturities during the financial year ending March 2017 (FY2017).

There has been a fundamental downward shift in the mining sector, with the downturn being deeper and the recovery longer than had previously expected. This has resulted in increased credit risk and weaker credit metrics for Vedanta, as well as the global mining sector, Moody's said.

Consequently, ratings need to be recalibrated to reflect the companies' expected performance over a more protracted challenging operating environment.

Slowing economic growth rates in China materially impact the demand for base metals and prices globally. Even as the Government of India's (Baa3 positive) move to raise duties on imports of aluminum and zinc will raise selling prices in India, the impact will be modest.

At the same time, the reduction in taxes on the production of crude oil to 20 per cent ad valorem ($6-$7 per barrel at current prices) from Rs 4,500 per tonne ($9/barrel) will lower the cash cost of production by some $2-$3/barrel.

However, the decline in oil prices has been so sharp that the reduction in taxes on production will have a muted impact on Vedanta's earnings.

Vedanta's B2 CFR also reflects refinancing risks associated with its $2.67 billion debt maturities in FY2017. The company's FY 2017 maturities include $1.9 billion due in the April -- July 2016 period and the balance $0.77 billion due in the remainder of the year.

While the company has so far secured financing for a part of these debt maturities, the absence of a completely executed refinancing plan keeps near term liquidity risk imminent.

Moody's recognizes that on a consolidated basis Vedanta has large cash balances of $8.9bn although almost 90% of which is held at its two listed subsidiaries Hindustan Zinc Ltd (unrated) and Cairn India Ltd. (unrated).

Furthermore, Vedanta's weak operating performance will result in a potential breach of some of its covenants in March 2016. This may require it to request that its lenders provide waivers and relaxations.

The company has confirmed that it has received lender approvals for waivers for the next covenant testing date on 31 March 2016 and relaxations for the periods beyond that date. The timely receipt of confirmations from its balance lenders is critical, Moody's added.