Vedanta split does not address debt: CreditSights

New Delhi : Vedanta Ltd's move to split into six separate units is unlikely to address the mining conglomerate's debt obligation, Fitch group firm CreditSights said, adding precarious debt situation at parent firm still remains unaddressed.

On September 29, Vedanta Ltd said its board has approved a major reorganisation, separating aluminum, oil and gas, power, steel and ferrous material and base metals into separate listed companies. "We do not believe that this reorganisation addresses Vedanta's debt obligations," CreditSights said in a note.

"The consolidated debt across all its proposed entities will still remain the same. We remain concerned that the precarious debt situation at Vedanta Resources is still unaddressed." VRL, the parent firm of Vedanta Ltd, has been the financing vehicle for its debt obligations and servicing that debt remains critical. "We believe Vedanta could have resorted to selling down its stake in wholly-owned units such as Cairn India, aluminum in order to generate cash and to pay down debt, instead of this route.

"While we acknowledge the company's efforts to create more shareholder value, we see cash leakage via dividend upstreaming largely unchanged and still a prominent issue in the new corporate structure," it said. Shareholders of Vedanta Ltd will get one share in each of the five new, listed companies for every 1 share held, through a simple vertical split. "We think the pending requisite approvals, in particular creditors' nod, pose execution risk for the transaction," it said.

Volcan Investments, the ultimate promoter entity of the company and the investment holding vehicle for major shareholder Anil Agarwal, will be renamed as Vedanta Incorporated (Vedanta Inc). After the reorganization, it will be the sole or majority owner of 17 investment vehicles that will keep the corporate structure complex. CreditSights saw the group structure ultimately "becoming more complex rather than simplified" as the proposed arrangement will contain 17 investment vehicles under Vedanta Inc/Volcan.

"The reorganisation also marks a volte-face from its long-intended strategy of consolidating and streamlining its various business over the past 10 years, such as assuming full ownership and consolidation of Cairn India into Vedanta Ltd, taking Vedanta Resources fully private and its delisting," it said. Stating that the reorganisation does not address Vedanta's debt obligations, it said the consolidated debt across all its proposed entities will still remain the same.

"While we see the business reorganization proposal as a positive for Vedanta Ltd's equity story, we are not that positive from a credit perspective. Overall, we see a modest credit negative impact for bondholders," it said. "There are still a few uncertainties and unanswered questions around the new company structure -- the role of Vedanta Resources and the intermediate holding companies, the treatment of investors of US dollar bonds issued out of Vedanta Resources and the intermediate hold companies, the composition of the Vedanta Group and the outcome for the share collateral for Vedanta's secured bonds."

USD 1 billion of bond repayment is due in January 2024. At present, Volcan owns Vedanta Ltd through an intermediary, Vedanta Resources Ltd (VRL), and its intermediate holding companies. "Given VRL houses the outstanding USD dollar bonds (and other debt), the reorganization carries limited clarity around how bondholders will be treated, amid the debt restructuring discussions," it said.

The uncertainties include the pledge of Vedanta Ltd shares for January 2024 and March 2025 bonds (assuming the bonds are extended out by 3 years to 2027/2028 and a portion of bonds is still outstanding at the time of reorganisation) be converted to a pledge of shares in each of the six listed companies. "Overall, we see a modest credit negative impact of business reorganization for bondholders," it added