Indian Infoline reported that Fitch Ratings has affirmed UK based Vedanta Resources PLC's long term Issuer Default Rating at 'BBB-' with Negative Outlook. Fitch has also affirmed the ratings on Vedanta's debt instruments as follows:
1. USD 1,250 million senior unsecured unsubordinated bonds issued in 2 tranches, 'BB+';
2. USD 600 million senior unsecured bonds due February 2010: 'BB+'
The ratings continue to reflect the company's comfortable liquidity position, with cash balances in excess of USD 4.8 billion as at FYE09 and low leverage with an adjusted net debt of around USD 0.36 billion and an adjusted net debt/EBITDA of 0.2x, although total debt levels have risen sharply since FYE08. The ratings also reflect the funds raised by the company in the form of the USD 1.25 billion convertible bond in June 2009, which will support liquidity at the Vedanta level.
The USD 1.5 billion of equity raised at subsidiary Sterlite Industries India Limited, USD 1 billion from external sources and USD 500 million from Vedanta will further increase financial flexibility. Fitch has also factored in the USD 1.7 billion acquisition of Asarco LLC and the USD 368 million acquisition of Dempo although Fitch said that the Asarco acquisition awaits creditor and other approvals. These operating assets will be EBITDA accretive for the company from the date of acquisition, which would partly offset Fitch's concerns over large cash outflows at Vedanta.
Vedanta's earnings and cash flows were severely impacted by a sharp fall in metal prices, especially from H2FY09. The company reported its lowest quarterly earnings in the past 3 years in Q3FY09, with an EBITDA of USD 10.1 million although this improved in Q4FY09 as base metal prices recovered. The company shut down its high cost, old technology Indian aluminium smelters which became unviable at current metal prices. It also faced operating losses at its Zambian copper operations. Although KCM's new smelter has lowered costs, it is facing problems in stabilization. The company is undertaking large CAPEX in Zambia and in Balco which should reduce production costs and increase capacities respectively, thereby increasing resilience to adverse cyclical developments. These concerns are partly offset by operating cash flows from competitive Sterlite, zinc and iron ore operations. The company is exposed to considerable execution risk of its USD 7.2 billion of organic CAPEX scheduled for FY10 to FY12.
The Negative Outlook reflects Fitch's concerns on Vedanta's high total debt levels and the execution risk of multiple, large CAPEX projects. Vedanta had a gross debt/ EBITDA of 3.2x in FY09 and Fitch believes it will remain within 3x-3.5x in FY10. Although these metrics are high in relation to Fitch's other 'BBB-' rated entities, the agency draws comfort from the large liquid funds and ensuing low net leverage. Fitch is also concerned with Vedanta's negative free cash flows in FY09, which are expected to continue in FY10.
Fitch believed that total debt/EBITDA will peak in FY10, with the majority of the CAPEX being completed by H1FY11. The major investments are in green field projects i.e. Vedanta Aluminium Limited and Sterlite Energy and CAPEX in the company's existing Indian zinc and KCM operations. It said that these projects will start generating returns from FY11, in turn lowering leverage. The ratings reflect the agency's expectation that Vedanta will improve its leverage metrics at both the gross and net level from FY11 onwards.
Over the longer term, if leverage returns to long term average levels by FY11, the Outlook could move back to Stable from Negative. However, the ratings could be own graded if the projects experience time and cost overruns or there is a delay in realizing the company's cost savings. Any material increase in the company's investments, thereby raising execution risk and exacerbating negative free cash flows could also put downward pressure on the ratings. Fitch expects the company's gross debt/EBITDA to remain under 2x on a sustained basis, with a corresponding net leverage in the region of 1.25x-1.5x higher sustained leverage would likely act as a negative trigger.
(Sourced from Indian Infoline)
