S&P Downgrades Vedanta Resources to ‘Selective Default’

S&P Global Ratings has downgraded Vedanta Resources Ltd to ‘selective default’ following the mining conglomerate’s agreement with creditors to extend the maturities of its three dollar bonds. The rating agency views this liability management exercise as a distressed transaction.

Background and Decision

Vedanta, burdened with debt, recently secured approval from bondholders to extend the maturities of USD 3.2 billion worth of bonds due in 2024 and 2025. As part of the deal, the company will make an upfront payment of USD 779 million, with the remaining principal extended for up to four years.

Rating Adjustment

On January 12, 2024, S&P lowered Vedanta Resources’ long-term issuer credit rating to ‘SD’ (selective default) from ‘CC’. Additionally, it downgraded the issue ratings on the company’s bonds maturing in January 2024, August 2024, and March 2025 to ‘D’ from ‘CC’.

Transaction Details

During the extension exercise, Vedanta addressed the repayment of three bond maturities totaling USD 3.2 billion through a combination of cash and new bonds. Approximately half of the January 2024 bond was exchanged for new bonds maturing in January 2027, with the remainder settled in cash. Similarly, 94% and 84% of the August 2024 and March 2025 bonds, respectively, were exchanged for new amortizing bonds maturing in December 2028, with the residual amounts prepaid in cash.

Assessment and Implications

S&P characterizes the transaction as distressed, emphasizing that Vedanta faced a high risk of default without this intervention due to significant upcoming debt maturities and constrained access to financing. The agency deems the terms of the transaction insufficient compensation for the maturity extension and cash flow subordination to a new financing facility.

Future Outlook

Vedanta’s debt repayments in fiscal 2025 and 2026 amount to approximately USD 900 million each, necessitating refinancing or alternative funding arrangements. S&P anticipates further deleveraging efforts, potentially through asset sales at subsidiary Vedanta Ltd, to enhance access to external financing. Consequently, the agency expects to raise Vedanta Resources’ rating to the mid-to-high ‘CCC’ category in the near future.

Conclusion

Despite securing a new USD 1.25 billion private credit facility maturing in April 2026 to facilitate the bond redemption, Vedanta faces significant refinancing challenges. The company’s ability to deleverage and improve its financial position will be critical in restoring investor confidence and accessing external funding avenues.