Lun 1 Oct 2012 14:44
Besoin de liquidités confirmé
(The following statement was released by the rating agency)
Oct 01 -
Overview
-- We expect Vedanta's oil subsidiary, Cairn, to generate strong cash flow, offsetting to an extent a subdued performance in its metals and mining business and operating risks for its iron ore business.
-- We're uncertain whether the Indian oil and metal mining company will receive sufficient dividends from its subsidiaries to partially repay its large debt maturities over the next 12 months.
-- We are affirming the 'BB' long-term foreign currency corporate credit rating on Vedanta and the 'BB' issue rating on the company's outstanding senior unsecured notes.
-- The negative outlook reflects the sizable refinancing needs at Vedanta and the vulnerability of the company's cash flows to operating risks, primarily in the iron ore segment.
Rating Action
On Oct. 1, 2012, Standard & Poor's Ratings Services affirmed its 'BB' long-term foreign currency corporate credit rating on oil and metals mining company Vedanta Resources PLC. The outlook is negative. At the same time, we affirmed the 'BB' issue rating on the company's senior unsecured notes. We also affirmed the 'BB' ratings on the senior unsecured notes issued by Vedanta's wholly owned subsidiaries and guaranteed by the company. Vedanta is listed in London, but most of its assets are in India.
Rationale
We affirmed the rating on Vedanta to reflect our expectation that the company's India-based oil subsidiary, Cairn India Ltd. (unrated), will continue to perform strongly over the next 12 months because of favorable oil prices. Cairn's contribution should offset the likely subdued cash flow generation at Vedanta's other entities due to weak metal prices and operating risks.
The rating on Vedanta reflects the company's exposure to commodity prices, and country and operating risks in India. Constraints include iron ore mining restrictions, time-consuming approval processes, and changes in taxes and royalties. These weaknesses are tempered by Vedanta's good business diversity following the acquisition of Cairn in 2011, the company's favorable market position in India, and its advantageous cost position, particularly in zinc and oil.
We view Vedanta's financial risk profile as 'aggressive' and its business risk profile as 'fair,' as defined in our criteria. Cairn generates strong cash flow for Vedanta and increases its diversity; metal and mining previously dominated business lines. Nevertheless, Cairn has asset-concentration risk and its key oil block in Rajasthan has a short operating record.
Production at Cairn is in line with our expectations; but the company's increasing tax burden has reduced our expectation of its EBITDA for fiscal 2013 (ending March 2013) to US$2.1 billion from US$2.5 billion. Still, we believe Cairn will continue to provide about a third of Vedanta's consolidated EBITDA in fiscals 2013 and 2014. Including Cairn, Vedanta's EBITDA in the first quarter of fiscal 2013 increased by about 27% from a year earlier. Vedanta's exposure to metal prices was shown in the first quarter of fiscal 2013, when non-oil EBITDA dropped 35%, primarily due to weaker metal prices.
Country and operational risks in Vedanta's metals and mining businesses in India have yet to subside. In particular, recent restrictions on iron ore mining in the state of Goa could have a material impact on Vedanta's EBITDA unless they are removed and production resumes to their earlier levels over the next three months. The lack of cash flow from iron ore production may become more acute at a time when Vedanta and its subsidiaries face sizable refinancing requirements. This is because iron ore is a key contributor to the cash flows of Sesa Sterlite, a subsidiary that will be formed after a corporate reorganization at Vedanta. The segment is also key to Sesa Sterlite's capacity to service its debt and intercompany loans following the completion of the restructuring this year.
Vedanta benefits from strong cash flow from its oil and zinc businesses. The diversity of its businesses--which include oil, base metals, iron ore and power--provides cash flow stability. The company's oil and zinc businesses are currently in the lowest cost quartile. The aluminum business can attain that once Vedanta secures its own bauxite sources; the business is currently in the second cost quartile.
Vedanta's financial strategy, which we view as aggressive, places much of its debt, but very limited cash, at the holding company. Vedanta's cash flow coverage would be supportive of a stronger financial risk profile when viewed on a consolidated basis. We expect the company's ratio of consolidated funds from operations (FFO) to gross debt to be about 25% over the next two years.
The debt maturity at Vedanta and its subsidiaries is sizable, at about US$3 billion over the next two years. While analyzing the company's debt maturity profile, we assume that bondholders of Vedanta's US$2.1 billion convertible bonds will exercise their put option. The large size of the company's maturities and the recurrent and time-bound nature of raising funds will test Vedanta's current ability to access the capital markets. The company's refinancing plans include using meaningful cash from its subsidiaries to partially repay debt. The effectiveness of this strategy remains to be seen, given the large size of maturing debt. Nonetheless, we believe Vedanta will continue to have access to multiple sources of funding from the capital markets.
Vedanta's reorganization of its Indian subsidiaries should help to reduce and service debt at the holding company. The restructuring is on track for completion in 2012, pending judicial approvals. Post-restructuring, interest payments for the holding company will drop to less than US$200 million a year from more than US$500 million at present. The reorganization, however, will keep the consolidated debt unchanged.
Liquidity
We assess Vedanta's liquidity as 'less than adequate,' as defined under our criteria. We assess liquidity primarily at the holding company level. On a consolidated basis, liquidity is adequate. We believe that on a consolidated basis, Vedanta's sources of liquidity will exceed its uses by more than 1.2x for fiscal 2013 and 2014. Our liquidity assessment is based on the following factors and assumptions:
-- Sources of liquidity include cash and cash equivalents of about US$6.8 billion as of March 31, 2012 and our expectation of FFO of about US$4.0 billion a year.
-- The company has about US$1 billion in undrawn project finance facilities, which it will use to fund expansion in the aluminum and power businesses.
-- Vedanta's key uses of liquidity are planned capital expenditure of about US$3.0 billion a year (much of which is at Cairn) and average debt of US$3.0 billion maturing each year for the next two years. We assume bondholders of the US$883 million convertible bonds will exercise their put option in April 2013.
In our view, the liquidity at the holding company is less than adequate because Vedanta retains all of its surplus cash at operating subsidiaries in India. The holding company maintains limited cash and has tied up US$300 million for forthcoming maturities. We believe that sizable cash leakages in the form of dividends to minority shareholders and taxes provide ongoing disincentives to declaring dividends. However, we expect the operating subsidiaries in India and Vedanta's Zambia operations to distribute dividends that will enable the holding company to cover interest payments in fiscal 2013 and to partially deleverage.
Vedanta has to comply with covenants under its various debt facilities. We expect the company to remain compliant with all the covenants over the next 12 months.
Outlook
The negative outlook on Vedanta reflects sizable and recurrent refinancing requirements at the holding company as well as its subsidiaries over the next two three years. It also takes into consideration the company's lack of track record of declaring dividends of the magnitude that it has projected over the next 12 months. The negative outlook further echoes our view that the ban on iron ore mining could extend beyond the next three months. Although iron sales do not contribute the majority of Vedanta's EBIDTA, they remain important since the cash flows from iron ore are not structurally subordinated to service Sesa Sterlite's liabilities.
We could revise the outlook to stable if: (1) Vedanta smoothly refinances its near-term maturing debt, including using the meaningful cash flow from subsidiaries to partially repay debt; (2) iron ore mining restrictions are removed and production returns to near pre-ban levels within the next three to four months; (3) Cairn's operating performance remains strong, with EBITDA generation of more than US$2.0 billion; and (4) Vedanta completes the group restructuring.
We could lower the rating if: (1) Vedanta receives dividend and interest payments that are less than its own debt-servicing needs; (2) Cairn's production and cash flow generation are considerably below our expectation of US$2.1 billion in EBITDA for 2013; (3) mining restrictions continue beyond three to four months, jeopardizing its iron ore EBITDA generation; (4) Vedanta's ratio of FFO to debt remains below 25% for a sustainable period; or (5) the company faces difficulties in consistently refinancing its debt.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings List
Ratings Affirmed