New Delhi: S&P Global Ratings said the proposed privatisation of Vedanta Resources Ltd's unit Vedanta Ltd will improve the group's corporate structure and credit profile.
This is despite a likely increase in Vedanta Resources' leverage due to the transaction. The proposed privatisation is subject to several approvals, including by the Vedanta Ltd board of directors, which is scheduled to meet on May 18.
"We expect a tender offer only around June or July this year. Meanwhile, Vedanta Resources' ability to refinance its near-term debt maturities, especially the $670 million bond maturing in June 2021, remains the key rating driver", S&P said.
A successful privatisation of Vedanta Ltd should increase the parent's refinancing options. "We may upgrade Vedanta Resources if its liquidity position improves as a result. However, a lack of progress on the refinancing over the next couple of quarters could lead us to lower the rating", the ratings agency said.
Vedanta Resources' inefficient corporate structure and dependence on dividends from Vedanta Ltd for debt servicing have constrained its credit profile. A successful privatisation of Vedanta Ltd would improve Vedanta Resources' access to the subsidiary's cash flows. This will be due to more efficient dividend upstreaming (compared to about 50 per cent that is currently paid to minority shareholders).
"Over time, we expect the privatization to improve liquidity at Vedanta Resources and facilitate deleveraging", S&P said.
"The benefits of the increased ownership will mitigate the increase in leverage following the privatisation. S&P said the exercise is likely to be debt-funded, and could add about $2.3 billion to Vedanta Resources' debt, assuming the privatization happens at the floor price of Rs 87.5 per share. The increase in debt is about 15 per cent of our adjusted consolidated debt estimate of $17 billion for the company as of March 2020.
"We believe the rise in debt is manageable considering the greater dividends available. However, if the funding of the privatization is short-term in nature, it could weaken Vedanta Resources' liquidity, especially with other debt maturities in the next 12 months. An increase in the tender price above Rs 87.5 per share is another risk, but we expect the company to be prudent while proceeding with the transaction", it said.
Vedanta Resources is a U.K. incorporated commodities producer with assets primarily in India. It owns 50.1 per cent of Vedanta Ltd, its Indian subsidiary, which holds most of its assets.