Vedanta's $3.1 bn impairment charge in Cairn India credit negative: Moody's

Says company will find it difficult to service acquisition debt with lower cash flow

Global rating agency Moody's today said the impairment charge taken on by Vedanta on its investment in Cairn India is credit negative for the parent company.

With oil prices expected to remain weak, it will take Vedanta longer to recoup its investment of $8.7 billion. It also increases the challenge of repaying $4.4 billion of acquisition debt financing from its operating cash flow, Moody's said in a statement.

Last Wednesday, Vedanta announced an Rs 19,180 crore (around $3.1 billion) impairment charge for loss of value of Cairn India. Vedanta owns 59.9% of Cairn India, which it purchased in 2011.

The massive impairment – 35% of the original acquisition price – highlights the eroded value of its oil and gas assets since 2011.

Vedanta had paid the price at the peak of the oil and gas cycle, when Brent crude prices exceeded $100 per barrel. On Friday, the closing price of Brent crude was $66 per barrel. 

Although the non-cash write-down will not immediately affect key credit ratios, it reflects the lasting effect of the lower oil prices on Vedanta’s business profile, the rating agency said.

Vedanta has received some $250 million in upstreamed dividends from Cairn India, which have been used to service the acquisition debt. 

As reflected by the impairment, Vedanta’s investment in Cairn India will reduce cash flow, making it more difficult to pay down debt. Vedanta’s leverage is expected to remain above the 3.5x-4.0x range for at least the next two years, Moody's added.