Standard & Poor's Ratings Services today said it had placed its earlier ‘BB’ long-term corporate credit rating on London-based metals and mining company Vedanta Resources Plc, and the rating on all of the company’s issues, on a “CreditWatch with negative implications”. Fitch Ratings also downgraded Vedanta’s long-term issuer default rating to ‘BB+’ from ‘BBB-’ and placed it on “rating watch negative”.
The CreditWatch action follows Vedanta’s announcement that it would acquire a controlling stake in India-based oil and gas company Cairn India Ltd.
“The CreditWatch placement reflects our view that the proposed acquisition could significantly increase Vedanta’s debt and weaken its financial risk profile to levels below our expectation for the current rating,” said an S&P statement.
Adding: “We believe Vedanta's financial flexibility could be strained by its plans to avail a bridge loan to fund the proposed acquisition,” said the release.
Vedanta and its Indian subsidiary, Sesa Goa Ltd, will acquire about 40 per cent and 20 per cent interest in Cairn, respectively, from the company's UK-based parent, Cairn Energy Plc. “We expect Vedanta to finance its direct share ($5.2-6.7 billion) of the proposed acquisition largely through debt. Vedanta depends on dividends from its subsidiaries to service its debt,” said S&P.
The Cairn acquisition will provide Vedanta with a foot-hold in the Indian oil and gas sector. Nevertheless, the company may not immediately benefit from business diversification, as Cairn is currently increasing its production capacity. Vedanta already has a significant portfolio of metals and mining operations and power assets.
“Vedanta has successfully integrated all of its acquisitions to date. Cairn, however, is its largest acquisition and marks Vedanta's entry into a new business — oil and gas,” said Standard & Poor’s credit analyst, Craig Parker. “As a consequence, Vedanta would heavily rely on Cairn’s existing management team to ramp up oil and gas production and make a meaningful contribution to Vedanta’s earnings.”
The CreditWatch action would be reviewed following discussion with Vedanta on the final funding structure for the acquisition and its effect on the financial risk profile, said S&P.
However, said the rating agency, Vedanta’s consolidated liquidity position is adequate. The company mitigates its exposure to volatile metal prices by maintaining sizable cash and liquid investments, which totalled about $7.2 billion as on March 31. It also uses undrawn, non-recourse project finance commitments as a source of ready liquidity, if needed.
