Moody's downgrades Vedanta as bond restructuring gets investor nod

Moody’s downgraded the credit rating of Resources Ltd (VRL), the London based parent of Vedanta Ltd, as the company goes ahead with its bond restructuring exercise that will delay its immediate debt obligations. The company’s corporate family rating (CFR) was downgraded to Caa3 from Caa2. Moody’s also downgraded the rating of the company’s bonds to Ca from Caa3.

It has maintained a negative outlook on the new ratings. “We view the debt restructuring as default avoidance and assess that the creditors have incurred an economic loss with respect to the original promise. We consider the transaction to be a distressed exchange under our criteria, which underpins our downgrade of VRL.s ratings," said Moody’s senior vice president Kaustubh Chaubal.

Vedanta Resources had last week received investor consent to restructure about $3.8 billion of its outstanding corporate bonds. The liability management exercise involves making a partial upfront payment and then delaying by 29 52 months the maturity of three of its outstanding bond series—those maturing in January 2024, August 2024 and March 2025.

The company also took the consent of holders of its bonds maturing in April 2026, although its repayment timelines remain unchanged. The restructuring aims to reduce the company’s immediate debt load and give it a longer repayment cycle. This is expected to help it break out of its loop of running against deadline to refinance debt maturities every few months and better meet its obligations through cash flows and the planned asset sales.

“…VRL’s near term liquidity will improve only slightly and its refinancing wall will start building up as it approaches its next bond maturity in April 2026", said Chaubal, who is also Moody's lead analyst for VRL. There is also a covenant as part of the restructuring that requires the company to refinance its April 2026 bond maturity by December 2025, failing which all amended bonds will mature in April 2026, he said.

This covenant “will keep the refinancing risk elevated and the likelihood of further distressed exchanges high", he said. Moody’s analysts further noted that the company’s ratings reflect its “unsustainable capital structure characterized by high financial leverage at the holding company and its perennially weak liquidity amid a period of continued large negative free cashflow".

Vedanta Resources is likely to face material liquidity issues over the coming 24 months and the risk of default risk remains high, the analysts noted. Analysts at S&P have also warned that once the company’s bond restructuring exercise is implemented, the three bonds whose maturity has been delayed will likely be downgraded to a ‘D’ rating.

The company’s long term credit rating could fall to ‘SD’ or selective default from ‘CC’ at present. However, the S&P analysts also noted that shortly after such a downgrade, they expect to raise the ratings “to a level we believe will reflect the liquidity position and capital structure of Vedanta Resources post transaction." The subsequent rating could be ‘CCC’ or higher, depending on the liquidity position of the company, they noted.

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