Free Fall: Vedanta Shares Shed 6% To Hit New 52-Week Low After Moody's Cut Parent's Rating

Metals and mining giant, Vedanta Limited experienced a free fall on stock exchanges during Wednesday's trade after leading rating agency, Moody's Investors Services downgraded its parent Vedanta Resources (VRl) ratings to Caa2 from CFR. The outlook of the billionaire Anil Agarwal-backed VRL remains negative. Elevated risk in debt restructuring is concerning in the case of VRL which has not made any significant progress on refinancing its upcoming debt maturities.

On BSE, in the early trade, the high dividend-yielding stock Vedanta nosedived to hit a new 52-week high, taking its day's downfall by at least 6.3%.

Currently, the stock traded at Rs 212.25 apiece, down by 5.3% on BSE. The company's market value is at Rs 78,897.50 crore.

On the previous day, Vedanta's shares stood at Rs 224.05 apiece on the exchange.

On Tuesday, Moody's downgraded the corporate family rating (CFR) of Vedanta Resources Limited (VRL) to Caa2 from Caa1. Also, the ratings on the senior unsecured bonds issued by VRL and those issued by VRL's wholly owned subsidiary, Vedanta Resources Finance II Plc, and guaranteed by VRL -- were downgraded to Caa3 from Caa2. Following this, Moody's stayed on the negative outlook for the conglomerate.

In its rating rationale, Moody's highlighted that VRL's credit quality is constrained by its weak liquidity because of large refinancing needs and interest expense amid tightening financing conditions in global capital markets.

On liquidity, Moody's said, "Holdco VRL's liquidity remains persistently weak with management fees and dividends from operating subsidiaries insufficient to meet its looming debt maturities." Data showed that VRL's subsidiaries' liquidity also remains weak.

As of June 2023, VRL's 63.8% owned subsidiary VDL reported consolidated cash of Rs 42.9 billion ($1.7 billion).

Also, VRL's consolidated debt/EBITDA leverage was 3.7x as of March 2023 - substantially strong for its Caa category CFR. Still, the company continues to face challenges in refinancing its debt, a reflection of reduced appetite from the lending community, and a key credit concern.

Further, VRL's Caa category CFR reflects the company's unsustainable capital structure, aggressive risk appetite and weak financial management.

Kaustubh Chaubal, a Moody's Senior Vice President and lead analyst on VRL said, "The downgrade reflects the elevated risk of debt restructuring over the next few months because VRL has not made any meaningful progress on refinancing its upcoming debt maturities, in particular the $1 billion bonds maturing each in January 2024 and August 2024."

According to Moody's, a softening commodity price environment will somewhat strain the ability of VRL's operating subsidiaries to generate cash flow. More importantly, the potential for contagion risk from the holdco's debt woes may also impair the operating subsidiaries' ability to raise funds to distribute dividends.

In regards to the outlook, Moody's said, "The negative outlook reflects VRL's persistently weak liquidity profile and Moody's concerns over the company's ability to address the imminent cash needs, especially at the Holdco."

Will Moody's upgraded its rating on VRL anytime soon? Nope!

Moody's said that it is unlikely to upgrade VRL's ratings or revise its rating outlook to stable before the company substantially improves its liquidity profile. Any potential rating upgrade will depend on the company meeting its refinancing needs over at least the upcoming 12-18 months as well as establishing a sustainable capital structure.

Further downgrades are on the cards! Moody's said it could downgrade VRL's ratings further if the company fails to make progress on funding arrangements to service its debt such that the risk of default increases materially higher than indicated by the current ratings.

London-based VRL is a diversified resources company with interests mainly in India. Its main operations are held by Vedanta Limited, where it owns 63.8%. Through VRL's various operating subsidiaries, the group produces oil and gas, zinc, lead, silver, aluminium, iron ore, steel and power.