In this column, Reorg editors and reporters take turns writing about trends in high yield, distressed debt, restructuring and bankruptcy in major Asian markets including China, South Asia and Southeast Asia. Any opinions or other views expressed in this column are the author’s own and do not necessarily reflect the opinions or views of Reorg or its owners. Send any question or concern you may have to asiaeditorial@reorg.com.
Metals-to-mining company Vedanta Resources Ltd. (VRL) needs to come up with a quick, smart and sustainable solution to tackle its large and closely spaced debt maturities, estimated at about $4 billion for the next fiscal year. Bondholders have been pressuring VRL since July 2021, demanding that it pare its debt using dividends from Indian opcos which have benefited from the rally in zinc and aluminium prices.
But Vedanta is well known for structuring astute last-minute deals to keep its refinancing game on, and is yet again keeping investors on edge, as they await the big reveal on its plans to meet debt obligations which are rapidly closing in. The difference this time is that investors have begun questioning Vedanta’s ability to make timely decisions, and to understand and manage the complex deal negotiations needed to arrange funding from multiple sources at the same time as it deals with high-level management changes.
Significantly, the company has been missing windows available to de-lever using dividends.
In July 2021, without discussions with its bondholders, Vedanta sought to raise the debt cap from $3.6 billion to $5 billion at step-down subsidiaries Twinstar Holdings Ltd. and Welter Trading so that it could raise additional debt for refinancing. Bondholders pushed back on the proposal, which would have led to dilution of collateral, and instead the company cut its debt using dividends.
The $1.7 billion dividend received last fiscal year, upstreamed from Vedanta’s Indian listco Vedanta Ltd. (VDL), did go towards debt servicing, including interest payments. But debt was not ultimately pared as Vedanta simultaneously took on additional debt to purchase a further 14.6% stake in VDL through a voluntary open offer, to plug dividend leakage to public shareholders.
The company has stated that it has reduced debt due in fiscal year 2023 by $1.4 billion. But to boost investor confidence it needs to announce a chunky dividend to pare its debt sufficiently in one go to avoid any near-term repayment stress. That would simultaneously prove management’s credibility and its intent to de-lever. Vedanta’s management, though, still seem keen to reserve the dividend strategy for a later date, and are instead focused on raising bank loans to meet refinancing needs.
The problem with that strategy is that the company’s reputation among lenders took a beating after its corporate family and senior unsecured bond ratings were downgraded by Moody’s on Oct. 31. Again, Vedanta has to take the blame for digressing from its deleveraging plans at the last minute, after it decided not to proceed with a tender offer in October for its $400 million 8% bonds due April 2023 and $500 million 7.125% bonds due May 2023.
Moody’s in an Aug. 3 report had flagged a downgrade risk if Vedanta Resources was unable to arrange long-term funds to refinance its bonds due 2023 by Oct. 31, and the company told multiple investors it was considering a tender offer for the due 2023s by mid to end-October. Instead, it decided to use around $250 million in low-cost loans from state-owned banks to repay upcoming bank debt, resulting in an immediate downgrade from Moody’s.
The damage post the downgrade might have been more limited had Vedanta not gone ahead and discontinued its ratings engagement with Moody’s. This has resulted in bank lenders conducting additional due diligence, causing delays in closures of needed loan financings.
The tender offer required $300 million to $400 million, which could have easily come from dividends and prevented a hit on both Vedanta’s credit rating and its perception in the market. The events should teach Vedanta’s management that a strategy of constantly cutting corners is penny wise but pound foolish.
The need to present a consistent and sustainable strategy to investors is more important against the backdrop of recent high-profile changes in Vedanta’s finance team. In April 2021, Vedanta’s CFO GR Arun Kumar left, after eight years with the group during which he led deals including the merger of Vedanta Ltd. and Cairn India. More recently, in November, Vedanta appointed Anupam Jindal as its new treasury head. Jindal previously served as CFO at Sterlite Technologies Ltd. Jindal replaces Divya Goyal who had been Head, Treasury and Corporate Finance at the group, as reported.
Developing a deep relationship and maintaining constant communication with investors is vital to Vedanta, given its heavy reliance on bond debt. Investors now face the need to build new connections with key personnel at the firm due to management churn, and new incumbents need to show that they understand the company’s working over the decades.
Vedanta can steer through its debt maturities until March 2023 without a hiccup. Its trouble might begin if it is unable to close the loans with the state-owned banks as anticipated.
There are still a few steps it can take to get cash to meet its debt repayments. One is the sale of its steel business, but Vedanta has stated that it does not want to sell at this moment. Second, the company could consider selling a stake in VDL, but given the effort Vedanta Resources has taken to boost its stake in VDL to plug cash leakage, dilution of its equity holding again is unlikely to be a favored option.
For now, Vedanta needs to liaise with its banks more effectively to ensure a robust loan pipeline is in place to supplement dividends from opcos, and tackle upcoming debt maturities. Keeping its bondholders updated on its plans – and not diverging from them at the last minute – would bolster investor confidence. Metal prices are still favorable, though commodities move in cycles, and are always susceptible to external shocks.
Bearing that in mind, the company should try and make use of dividends as much as possible to bring down its debt. Most importantly, Vedanta should stop trying to cut corners and wait for a favorable window to deleverage. With few easy options on the table, the time to act is now.
–Malvika Joshi, India Editor
