Standard & Poor's Ratings Services has assigned its 'BB' issue rating to a $500 million bank loan that Vedanta Resources plc "unconditionally and irrevocably guarantees".
Monte Cello Corp, a wholly owned subsidiary of Vedanta, will take out the loan and advance the proceeds to its parent. Vedanta will use the amount to refinance debt of $353 million, and make interest and dividend payments of $138 million.
The negative outlook reflects our view of Vedanta's: large debt burden and its sizable debt maturity over the next two years; need to send significant cash upstream or refinance; and increased operating risk, which could slow growth in cash flow, S&P Ratings Services said in a media statement.
The rating on the bank loan, due in 2018, is the same as the corporate credit rating on Vedanta because we do not notch down issue ratings for subordination of debt in India. Further, Vedanta's cash flow diversity reduces structural subordination with the holding company organizational structure, S&P added.
"In our view, the bank loan demonstrates Vedanta's continued ability to access debt markets for refinancing. However, the partial use of the loan proceeds to service debt and pay dividends to shareholders emphasizes Vedanta's preference to incur additional debt rather than service debt through cash sent upstream from subsidiaries," S&P said.
Vedanta has not needed sizable cash receipts from its subsidiaries due to a delay in the closure of the acquisition of Cairn India (not rated). The subsidiaries had a total cash balance of $7.8 billion as of March 31, 2011. However, cash receipts from the subsidiaries have lagged our expectations. We estimate that Vedanta will require about $500 million of annual interest payments due to its heavy reliance on holding company debt to fund the Cairn acquisition.
"Vedanta's production volumes of zinc, alumina, and copper from India in the six months ended September 2011 (first half of fiscal 2012) match our expectations. While aluminum and power production was below our expectations, production should increase in the second half of fiscal 2012 due to capacity additions in the power segment and corrective measures in the aluminium business," said the statement.
Vedanta's iron-ore production in India and copper production in Zambia fell short of our expectation. A Supreme Court ban on mining and direct sales of iron ore in Karnataka hampered Vedanta's production in India. Copper production at Zambia was hit by a drop in custom smelting due to reduced availability of concentrate. Our base-case scenario assumes lower commodity prices than current rates. We therefore believe that the recent fall in commodity prices will not affect our base-case forecast.
