Vedanta's Proposed Debt-Financed Acquisition will Simplify Group: Moody's

Vedanta's open offer to acquire the remaining 49.9 per cent shareholding it does not own and to delist it from the Bombay Stock Exchange (BSE) is credit positive and a major step in the simplification of Vedanta's complex group structure, according to Moody's Investors Service.

Earlier this week, Vedanta said the acquisition of minority stake will be at a price that is the higher of either the floor price Rs 87.50 per share -- a 10 per cent premium over the closing market price of Rs 79.60 on May 11 -- or the price discovered through the reverse book building process.

If successful, said Moody's, the transaction will provide Vedanta better access to future cash surpluses and cash of around 1.4 billion dollars held at Vedanta Ltd and its wholly-owned subsidiary Cairn India Holdings in December 2019.

Additionally, Vedanta's higher shareholding in Vedanta Ltd will substantially reduce cash leakage while extracting dividends from step-down subsidiary Hindustan Zinc Ltd which held cash of three billion dollars in December. The transaction will also give Vedanta the flexibility to allocate its assets and liabilities across the group, including moving debt closer to operating assets.

Notwithstanding these long-term positives, the debt-financed transaction will weaken Vedanta's consolidated credit metrics which are already stretched, and comes during heightened macroeconomic uncertainty with disruptions caused by coronavirus pandemic and resource price declines dampening the company's earnings and cash flow generation, said Moody's.

Vedanta's liquidity is weak, especially at the holding company (holdco) with 1.8 billion dollars debt maturing until September 2021, including a 670 million dollar bond due in June 2021. Widening yields, falling bond prices and tight capital market liquidity have heightened refinancing risk.

Moody's said the proposed privatisation debt in the short term will further weaken the holdco's liquidity. Besides, reduced levels of disclosure or transparency for bond holders or increased incidence of related party transactions or both could pressure the company's credit profile.