Moody’s Investors Service has taken the decision to downgrade Vedanta Resources Limited’s (VRL) corporate family rating (CFR) from Caa1 to Caa2, citing increased risks of debt restructuring in the near future. This downgrade also applies to the senior unsecured bonds issued by Vedanta Resources and its wholly owned subsidiary, Vedanta Resources Finance II Plc, which are guaranteed by Vedanta Resources.
The rating agency defines a Caa3 rating as highly speculative with a likelihood of being near or in default but some potential for recovering principal and interest, while a Caa2 rating is within the speculative grade and is considered of poor standing with a very high credit risk.
The primary reason for the downgrade is the perceived elevated risk of debt restructuring that VRL faces in the next few months, particularly concerning the $1 billion bonds maturing in January 2024 and August 2024. Despite VRL’s relatively strong consolidated debt/EBITDA leverage of 3.7x as of March 2023, which is substantial for its Caa-rated category, the company has encountered difficulties in refinancing its debt due to reduced interest from the lending community.
In an effort to alleviate some of the financial pressure caused by its imminent cash requirements, VRL sold a 4.3% stake in key subsidiary Vedanta Limited for approximately $500 million in August 2023.
Moody’s also highlighted the concentrated ownership structure of VRL, with sole shareholder Volcan Investments, as a source of elevated risk for related party transactions that could impact creditors negatively. Additionally, several senior management departures in recent years pose risks to the continuity and stability of VRL’s operations.
The negative outlook assigned by Moody’s reflects VRL’s persistently weak liquidity profile and the rating agency’s concerns about the company’s ability to address its immediate cash needs, particularly at the holding company level.
This downgrade follows a previous move by Moody’s earlier this year when it downgraded VRL’s CFR to Caa1 from B3 and also downgraded the ratings on the senior unsecured bonds issued by VRL to Caa2 from Caa1. The agency noted that VRL had reduced approximately $2.0 billion of its debt during fiscal 2023.
Moody’s emphasized that Vedanta’s liquidity remains persistently weak, with management fees and dividends from operating subsidiaries insufficient to cover its upcoming debt maturities. However, the agency views maintaining liquidity and proactive liability management as more crucial for preserving VRL’s credit quality than debt reduction, given its Moody’s-adjusted consolidated gross debt/EBITDA remains around 4.0x, comfortably below the previous downgrade trigger of 5.5x.
On the stock market, Vedanta’s shares settled at ₹224.05 apiece on the BSE, marking a 0.27% change on Tuesday. The ongoing challenges and credit risks faced by Vedanta Resources Limited continue to be closely monitored by financial analysts and investors.
