 "S&P downgrades Anil Agarwal's Vedanta Resources; warns of potential default")
Anil Agarwal-owned Vedanta Resources (VRL) on Thursday asked its bond investors to revise the terms of its bonds by extending the maturities and making an upfront part payment for the bonds. This prompted global rating firm Standard & Poor’s (S&P) to downgrade VRL’s long-term issuer rating and bonds from ‘CCC’ (‘currently vulnerable’) to ‘CC’ (‘currently highly vulnerable’), saying the potential transaction involves the extension of the maturities of three dollar-denominated bonds amounting to $3.2 billion.
“We view VRL’s proposed liability management exercise involving three of its US dollar-denominated bonds totalling $3.2 billion as a distressed transaction under our criteria,” S&P said in a statement.
S&P said Vedanta’s move to extend maturity constituted a distressed exchange and would probably result in a downgrade to ‘SD’ (‘selective default’).
“The response from the rating agency is part of a standard review process undertaken when a company initiates a consent solicitation on its bonds. Vedanta is pleased to see the positive response from the market, with the prices of the entire basket of bonds moving up between 3 per cent and 5 per cent following the news. The company expects further announcements from rating agencies as we complete the consent solicitation process. We believe the proposed transaction is in the best interests of all bondholders while working towards delivering a long-term sustainable capital structure for the company,” said a company spokesperson.
The company’s bonds are due in January and August next year and in March 2025. As part of the exercise, the company intends to address the three bond maturities worth $3.8 billion by using a mix of cash and issuing new bonds. Of these, bonds worth $3.2 billion are rated by S&P.
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VRL will exchange about half of the January 2024 bonds with new bonds maturing in January 2027, August 2024, and March 2025 bonds with new amortising bonds maturing in December 2028.
In a statement, Vedanta said there is no proposed change to the principal amount or coupon on notes due in April 2026. The company is seeking approval to revise the fixed charge coverage ratio.
The consent exercise will be successful only if at least 66.67 per cent of the bondholders vote in favour of the extension of each of the three bonds with a quorum of two-thirds of the total outstanding amount of each bond.
The company is offering to pay $779 million by early February for notes coming due in 2024 and 2025 and would extend the maturity on the remaining principal by four years. The move is part of a consent solicitation exercise for its outstanding dollar bonds designed to improve its capital structure and overall financial position, per the company’s notice to bondholders.
VRL has a $1 billion dollar bond maturing in January next year and last week signed a new $1.25 billion debt facility from international investors at a higher interest rate to pay the bonds, which are due for payment in January.
Vedanta’s shares closed flat at ~255 per share on the BSE on Thursday.
S&P said the ratings remain on CreditWatch with negative implications, where they were first placed on September 29, 2023.
The CreditWatch status reflects the likelihood that S&P would downgrade VRL to ‘SD’ if the company completes the transaction.
“We could also lower the ratings on the company’s three bonds to ‘D’ (‘default’) in that event,” the rating agency said.
The likelihood of a conventional default in the absence of the transaction is high. This is because of the company’s large upcoming debt maturities and weakened access to both internal cash flow and external financing.
The company has about $4.5 billion in debt maturities through March 2025, it added.
S&P said it does not consider the new terms of the proposed transaction as constituting adequate compensation to offset the lengthened maturities and new terms that are different from the original promise.