Moody's upgrades Vedanta Resources's corporate family rating
Moody's upgraded the corporate family rating (CFR) of mining group Vedanta Resources on Monday as stabilising commodity prices looked set to enhance the company's EBITDA and cash flow generation.
Analysts at the ratings agency upgraded Vedanta's CFR from B1 to Ba3, while at the same time upping its senior unsecured bond rating to B2 from its previous B3 rating.
Moody's said the upgrade reflected the "significant amount of process" the firm had made in reducing absolute debt levels following the merger of two of its subsidiaries, Vedanta and Cairn India.
"The company has reduced about 17% of its gross debt," said Kaustubh Chaubal, vice president and senior analyst at Moody's, before going on to say that the he expected Vedanta to further reduce its gross debt position as it improved earnings on its path to dropping its debt to EBITDA ratio to 3.4x by March 2018.
Higher sales volumes thanks to increased production was expected to pave the way for earnings and cash flow expansion, but Moody's did note that, in addition to dividend payments, average capital expenditures of between $1.2bn and $1.5bn would "likely limit free cash flow generation".
"Moody's expects the current operating environment and the company's track record in turning around its operations will help in Vedanta plc's ability to refinance the term debt -- largely owed to relationship banks -- aggregating $1.2bn due over the next 16 months," read Monday's investor note.
The analyst said the Ba3 rating took into account Vedanta's scale, diversified business profile and its track record of relatively stable margins through commodity cycles.
The two notch lower B2 rating for its unsecured bonds was issued to reflect the "bondholders relatively weak position against the creditors of operating subsidiaries."
The report stated, "The two-notch difference reflects the acute legal and structural subordination of holding company debt holders to the rest of the group, due to a highly complex group structure with less than 100% shareholding in key operating subsidiaries."
"The stable rating outlook reflects Moody's view that Vedanta's operating and financial metrics will continue to steadily improve with stable commodity prices. In particular, Moody's expects that its earnings expansion and a permanent reduction in gross debt will increase the pace of correction in the company's leverage," it added.