Vedanta Resources' ratings have been under pressure as weak commodity prices have affected group earnings. This led to Moody's downgrade of Vedanta Resources' CFR to B2 negative in March this year.
Moody's Investors Service says that Vedanta Ltd.'s(unrated) revised merger terms with Cairn India Ltd.(unrated) have no immediate impact on Vedanta Resources plc's B2 corporate family rating (CFR), Caa1 senior unsecured notes rating and negative outlook.
While the revised terms entail a rise in debt/cash out flow of an estimated $447 million compared to $120 million under the original terms they will give Vedanta Ltd. complete access to Cairn India's large cash holdings, as well as provide the flexibility to reduce debt, thereby lowering leverage and reducing subordination within the group.
As such, the successful execution of the merger, to the extent that it leads to de-leveraging, will be credit positive. Positive rating implications could emerge if adjusted leverage improved to less than 4.5x on a sustained basis.
Should the merger proceed as announced subject to approval, in a cashless all-stock transaction minority shareholders would receive one equity share and four 7.5% preference shares in Vedanta Ltd. for every share held in Cairn India. Shareholders will have the option of redeeming the preference shares within 30 days, or holding until maturity for 18 months.
Following completion of the transaction, Vedanta Resources' shareholding in its subsidiary Vedanta Ltd. will fall to 50.1% from 62.9% . At end-June 2016, Cairn India had $3.5 billion in cash and no external debt outstanding.
"Although delayed from the initial announcement in June 2015, the revised terms are a step forward in the merger proceedings the merger will provide Vedanta Ltd. better access to Cairn India's large cash balances of $3.5 billion, as previous access was only possible through the up-streaming of dividends," says Kaustubh Chaubal a Moody's Vice President and Senior Analyst.
"We also view the proposed Cairn India merger as a major step in the simplification of Vedanta Resources' complex structure and, in particular, in addressing some of the risks associated with the group's thinly capitalized, but highly leveraged parent company," adds Chaubal who is also Moody's Lead Analyst on Vedanta.
We expect capacity ramp-ups, continuing cost rationalization initiatives, reductions in absolute debt levels and increases in commodity prices from the troughs in January 2016 to drive the improvement in adjusted leverage of 4.3x - 4.8x by March 2017 from 5.5x at March 2016. Furthermore, while debt will potentially rise by ~$447 million, with preference shares issued as per the revised merger terms, access to Cairn India's $3.5 billion in cash and future cash flow will enable the group to repay part of its debt, further improving consolidated leverage.
Moreover, the structural subordination of the senior unsecured debt at Vedanta Resources remains. Although the merger will remove one layer between Vedanta Resources' senior unsecured debt and Cairn India's cash, Vedanta Resources will remain without operating assets and dependent on the up-streaming of dividends from the operating and intermediate companies. In addition, with its shareholding in Vedanta Ltd. falling to 50.1% from 62.9%, cash leakage to minority shareholders will reduce Vedanta Resources' access to Vedanta Ltd.'s profits.
To narrow the notching between the B2 CFR and the Caa1 senior unsecured debt rating, Moody's would look for total priority debt to fall below 35%-40% of total consolidated debt, and for total priority debt to fall to less than 15%-20% of total group assets. As of 31 March 2016, the ratios stood at 54.7% and 29.3%, respectively. These ratios apart, we will also look at holding company liquidity and coverage metrics to consider narrowing the notching.
Debt reduction following the merger will reduce rating pressure, although the merger increases the risk that Vedanta Ltd. will ultimately be held accountable for Cairn India's $3.2 billion disputed tax liability.
Vedanta Resources' ratings have been under pressure as weak commodity prices have affected group earnings. This led to Moody's downgrade of Vedanta Resources' CFR to B2 negative in March this year.
While the revised terms entail a rise in debt/cash out flow of an estimated $447 million compared to $120 million under the original terms they will give Vedanta Ltd. complete access to Cairn India's large cash holdings, as well as provide the flexibility to reduce debt, thereby lowering leverage and reducing subordination within the group.
As such, the successful execution of the merger, to the extent that it leads to de-leveraging, will be credit positive. Positive rating implications could emerge if adjusted leverage improved to less than 4.5x on a sustained basis.
Should the merger proceed as announced subject to approval, in a cashless all-stock transaction minority shareholders would receive one equity share and four 7.5% preference shares in Vedanta Ltd. for every share held in Cairn India. Shareholders will have the option of redeeming the preference shares within 30 days, or holding until maturity for 18 months.
Following completion of the transaction, Vedanta Resources' shareholding in its subsidiary Vedanta Ltd. will fall to 50.1% from 62.9% . At end-June 2016, Cairn India had $3.5 billion in cash and no external debt outstanding.
"Although delayed from the initial announcement in June 2015, the revised terms are a step forward in the merger proceedings the merger will provide Vedanta Ltd. better access to Cairn India's large cash balances of $3.5 billion, as previous access was only possible through the up-streaming of dividends," says Kaustubh Chaubal a Moody's Vice President and Senior Analyst.
"We also view the proposed Cairn India merger as a major step in the simplification of Vedanta Resources' complex structure and, in particular, in addressing some of the risks associated with the group's thinly capitalized, but highly leveraged parent company," adds Chaubal who is also Moody's Lead Analyst on Vedanta.
We expect capacity ramp-ups, continuing cost rationalization initiatives, reductions in absolute debt levels and increases in commodity prices from the troughs in January 2016 to drive the improvement in adjusted leverage of 4.3x - 4.8x by March 2017 from 5.5x at March 2016. Furthermore, while debt will potentially rise by ~$447 million, with preference shares issued as per the revised merger terms, access to Cairn India's $3.5 billion in cash and future cash flow will enable the group to repay part of its debt, further improving consolidated leverage.
Moreover, the structural subordination of the senior unsecured debt at Vedanta Resources remains. Although the merger will remove one layer between Vedanta Resources' senior unsecured debt and Cairn India's cash, Vedanta Resources will remain without operating assets and dependent on the up-streaming of dividends from the operating and intermediate companies. In addition, with its shareholding in Vedanta Ltd. falling to 50.1% from 62.9%, cash leakage to minority shareholders will reduce Vedanta Resources' access to Vedanta Ltd.'s profits.
To narrow the notching between the B2 CFR and the Caa1 senior unsecured debt rating, Moody's would look for total priority debt to fall below 35%-40% of total consolidated debt, and for total priority debt to fall to less than 15%-20% of total group assets. As of 31 March 2016, the ratios stood at 54.7% and 29.3%, respectively. These ratios apart, we will also look at holding company liquidity and coverage metrics to consider narrowing the notching.
Debt reduction following the merger will reduce rating pressure, although the merger increases the risk that Vedanta Ltd. will ultimately be held accountable for Cairn India's $3.2 billion disputed tax liability.
Vedanta Resources' ratings have been under pressure as weak commodity prices have affected group earnings. This led to Moody's downgrade of Vedanta Resources' CFR to B2 negative in March this year.
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