Vedanta seeks funding lifeline

Published 6 April, 15:51

Vedanta Resources is close to securing around US$1bn of funding at one of its operating companies, easing near-term debt repayment concerns, S&P analysts said.

The company has been in discussions with credit funds and banks to raise funds, said sources, though nothing has been finalised yet.

The metals, mining and energy company, rated B– by the rating agency, is heard to have been in talks with Barclays, Deutsche Bank, JP Morgan and Standard Chartered for the loan over the past few months. It is awaiting Reserve Bank of India approval for its Indian unit, Vedanta Limited, to provide the guarantee for the loan, which would be raised by offshore Mauritius based holding company THL Zinc and is heard to be priced at 800bp over SOFR, sources said.

“The access to liquidity at its subsidiary has alleviated the downside rating pressure as the company is able to meet its debt servicing obligations until December 2023," Neel Gopalakrishnan, director of corporate ratings at S&P, said during a webinar on Tuesday.

Vedanta Resources is also holding separate discussions to raise over US$2bn in additional capital through various funding options, and the current rating reflects S&P's expectations that "some of these discussions will lead to the company tying up additional funds to prolong its liquidity," Gopalakrishnan said.

Vedanta Resources did not respond to an email on the availability of the credit facilities.

The company has debt obligations totaling US$4.2bn (US$3.5bn of debt maturities and US$700m–$750m of interest) in the next two fiscal years starting April 1, S&P estimated in a note on Monday.

It had been hoping to raise around US$3bn by selling its international zinc assets to subsidiary Hindustan Zinc, but the Indian government, which owns around a 29.5% stake in Hindustan Zinc, objected to the proposed transaction.

Market participants are drawing comfort from the availability of diverse sources of capital for debt repayment in the coming months.

"There are multiple funding options which Vedanta Resources can tap into such as loans from relationship banks, borrowing at the Mauritius subsidiary THL Zinc level, securitisation of the royalty brand [Vedanta] fee and also raising capital from credit funds, besides dividends," said Deepak Sood, partner, head of fixed income at asset manager Alpha Alternatives.

Vedanta Ltd and its subsidiaries pay an annual royalty fee to Vedanta Resources for branding rights to the Vedanta name.

Vedanta Resources is rumoured to have appointed US financial services firm Cantor Fitzgerald to arrange syndicated loans of US$2bn from credit funds.

The additional funding is likely to be supported by the borrowing capacity at intermediate holding company TwinStar Holding, unpledged stakes in operating company Hindustan Zinc and international zinc assets, CreditSights said in a note on Wednesday.

Milking dividends

While Vedanta Resources works on putting these funds in place, it will have to tap its hefty dividend stream to meet bond payments due in April and May.

Vedanta Limited, in which Vedanta Resources owns a 70% stake, announced a fifth interim dividend of Rs76.21bn (US$926m) for the financial year ending March 31 2023, which will be used to pay the maturities on US$400m 8% bonds due in April and US$500m 7.125% notes due in May, said analysts.

"I am confident Vedanta will be able to repay the April and May dollar notes," said Trung Nguyen, senior credit analyst at Lucror Analytics. The company has demonstrated repeatedly that it has a high willingness to pay up, including by upstreaming via dividends, although that results in cash leakage, Nguyen said.

The reliance on dividends to meet debt obligations has depleted cash at its units.

The total dividend payouts by Vedanta Limited, including its Hindustan Zinc subsidiary, for the year will be more than Rs400bn, the highest ever, which will leave a cash balance of less than Rs200bn as of end-March against more than Rs300bn in March 2022, according to Crisil.

"Vedanta Resources is struggling to repay high interest costs on their debt, hence they are milking higher dividends from Hindustan Zinc, because they do not have any other options available," said Aditya Shah, chief investment officer at JST Investments, a financial advisory firm. "Higher dividends are good from a shareholder point of view, but it amplifies corporate governance concerns."

S&P said the liquidity cushion at the operating companies is declining, which will increase the company's dependence on external funding at a time when financial conditions are tightening. Therefore, "a credible refinancing plan for the US$1bn January 2024 bond should be in place at least six months prior to the bond maturity," Gopalakrishnan said.

Vedanta Resources' US dollar notes continue to trade at distressed levels because of "the ongoing refinancing risk as the market is still not convinced of the company’s efforts," said Nguyen at Lucror, who remains positive on the notes.

"The company is having a lot of conversations with various investors and lenders," said a DCM banker who is working with Vedanta Resources. "There is due diligence work going on, but nothing is signed yet."

The outstanding US dollar bonds have not reacted much apart from the US$1.25bn 8.95% March 11 2025s, which rallied over 4 cents to 66 cents to the dollar to yield 34.7% following the S&P note on Monday.

By Krishna Merchant

Additional reporting by Mirzaan Jamwal