Vedanta Resources PLC ‘BB’ ratings placed on CreditWatch negative
Standard & Poor’s ratings services said that it had placed its ‘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 CreditWatch with negative implications.
The CreditWatch action follows Vedanta’s announcement to acquire controlling stake in Cairn India Ltd (not rated). The relase from S&P says “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. 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 (not rated).” We expect Vedanta to finance its direct share (US $5.2 billion-US $6.7 billion) of the proposed acquisition largely through debt. Vedanta depends on dividends from its subsidiaries to service its debt. 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.”
Vedanta intends to complete the proposed transaction by the first quarter of 2011. The proposed transaction is subject to approval from the regulators and government agencies. Vedanta’s consolidated liquidity position is adequate, in our opinion. The company mitigates its exposure to volatile metal prices by maintaining sizable cash and liquid investments, which totaled about US $7.2 billion as on 31 March 2010. It also uses undrawn, non-recourse project-finance commitments as a source of ready liquidity, if needed. We believe that Vedanta’s financial flexibility could be strained by its plans to avail a bridge loan to fund the proposed acquisition.
We aim to resolve the CreditWatch action following our discussion with Vedanta on the final funding structure for the acquisition and its effect on the company’s financial risk profile. In addition, we will assess the potential effects on Vedanta’s business risk profile from petroleum-based earnings and the cost structure at Cairn. We will also review Cairn’s forecast performance and the final capital structure at Vedanta.
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