Mer 19 Oct 2011 21:01
TEXT-S&P assigns 'BB' rtg to Vedanta Resources PLC bank loan
Wed Oct 19, 2011 10:58am GMT
Oct 19- Standard & Poor's Ratings Services said today that it had assigned its 'BB' issue rating to a US$500 million bank loan that Vedanta Resources PLC (foreign currency BB/Negative/--) unconditionally and irrevocably guarantees. Monte Cello Corp. N.V. (not rated), a wholly owned subsidiary of Vedanta, will take out the loan and advance the proceeds to its parent. Vedanta will use the amount to refinance debt of US$353 million, and make interest and dividend payments of US$138 million.
The rating on the bank loan, due in 2018, is the same as the corporate credit rating on Vedanta because we do not notch down issue ratings for subordination of debt in India. Further, Vedanta's cash flow diversity reduces structural subordination with the holding company organizational structure.
The rating on Vedanta reflects the company's aggressive debt-funded growth strategy, increasing operational risks in some businesses, exposure to volatile commodity prices, and limited backward integration in aluminum and copper. The company's increasing diversity in cash flows, favorable market position, low-cost operations in India, and strong project pipeline partly offset these weaknesses.
In our view, the bank loan demonstrates Vedanta's continued ability to access debt markets for refinancing. However, the partial use of the loan proceeds to service debt and pay dividends to shareholders emphasizes Vedanta's preference to incur additional debt rather than service debt through cash sent upstream from subsidiaries.
Vedanta's willingness to send cash upstream is untested. The company has not needed sizable cash receipts from its subsidiaries due to a delay in the closure of the acquisition of Cairn India Ltd. (not rated). The subsidiaries had a total cash balance of US$7.8 billion as of March 31, 2011. However, cash receipts from the subsidiaries have lagged our expectations. We estimate that Vedanta will require about US$500 million of annual interest payments due to its heavy reliance on holding company debt to fund the Cairn acquisition.
Vedanta's production volumes of zinc, alumina, and copper from India in the six months ended September 2011 (first half of fiscal 2012) match our expectations. While aluminum and power production was below our expectations, production should increase in the second half of fiscal 2012 due to capacity additions in the power segment and corrective measures in the aluminium business.
Vedanta's iron-ore production in India and copper production in Zambia fell short of our expectation. A Supreme Court ban on mining and direct sales of iron ore in Karnataka hampered Vedanta's production in India. Copper production at Zambia was hit by a drop in custom smelting due to reduced availability of concentrate. Our base-case scenario assumes lower commodity prices than current rates. We therefore believe that the recent fall in commodity prices will not affect our base-case forecast.
The negative outlook reflects our view of Vedanta's: (1) large debt burden and its sizable debt maturity over the next two years; (2) need to send significant cash upstream or refinance; and (3) increased operating risk, which could slow growth in cash flow.
RELATED CRITERIA AND RESEARCH
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Les LT vaincront !
