S&P warns of possible credit rating downgrade for Vedanta Resources over debt policy shifts

S&P Global Ratings has issued a cautionary note, stating that any changes in Vedanta Resources financial policy regarding debt transactions may result in a potential downgrade of its current 'B-' rating to 'CCC' or 'CC,' as detailed in their credit FAQ addressing the implications of a liability management exercise for Vedanta Resources' credit rating.

This rating action will happen if Vedanta tries a debt deal without enough compensation or buys back debt at a lower price than its face value in secondary markets. If Vedanta goes through with such a deal, S&P would probably lower Vedanta's rating to 'SD' and the bond ratings affected by this would drop to ‘D'.

The clarification has come following a bondholder identification exercise announced by the company on August 24, 2023. Vedanta management has met investors in Singapore and Hong Kong this week and have discussed a potential extension of upcoming bonds through partial bond exchange and partial upfront payment, as reported by ET on September 12.

S&P said that according to their regular interactions with Vedanta, the company is exploring ways to meet its obligations and avoid defaults.

S&P maintains a 'B-' rating but with a negative outlook on Vedanta with the expectation that the company will secure additional funds to meet upcoming debt maturities. They estimate a current shortfall of about $600 million until January 2024, with a potential further deficit of $1 billion-$1.5 billion by August 2024. However, the negative outlook implies a significant chance that Vedanta may not succeed in raising the necessary funds, making its progress in fund raising by the end of 2023 a crucial point for potential rating action.

Also, the rating for Vedanta is primarily determined by its liquidity outlook for the next 12-18 months, given significant upcoming debt obligations. These include a $1 billion bond due in January 2024, a $0.95 billion bond due in August 2024, and a US$1.2 billion bond due in March 2025. Additionally, the company faces various loan repayments of $200 million by late 2023 and another $1 billion in FY2025. There is an intercompany loan of $449 million that must be repaid to Vedanta Limited in December 2024.

The rating agency said dividends from Vedanta Ltd. to Vedanta Resources over the next 12-18 months will be lower than previous year and is estimated at $400 million to $500 million at the holding company level. It may further decrease if Vedanta Limited.'s operations weaken. However, Vedanta's EBITDA for this year FY 24 is expected to be at $4.5 billion, largely similar to that of FY 2023, despite the fall in commodity prices as the decline in product prices is offset by a corresponding fall in the cost of production.