Buysiders Expect Hindustan Zinc Dividends to Shore Up Vedanta Cash, See Co. More Likely to Refinance Oaktree Facility After August Than Issue Tender Offer for 2023 Bonds

Editor’s Note: The following story was published in the evening on July 18, and has been republished to reach a wider audience.

Buyside sources that Reorg spoke to said they expect Vedanta Ltd. subsidiary Hindustan Zinc Ltd’s INR 88.732 billion ($1.114 billion) interim dividend to be used to shore up cash for London-based Vedanta Resources. Four of the buysiders said they felt that the company would be more likely to use this cash to repay existing maturities, such as the Oaktree facility, than to run a tender offer to buy back the 2023 notes.

Vedanta Ltd. announced on July 14 that its board of directors will meet on July 19 to consider and approve a second interim equity dividend for the financial year ending March 31, 2023, as reported.

Two of the sources noted that the make-whole clause of the $1 billion 13.5%-13.85% three-year Oaktree Capital Management facility expires in August, and felt that repayment of this facility is a better use of dividend proceeds than a tender offer for the $500 million 7.125% notes due 2023 and the $400 million 8% senior unsecured notes due April 2023.

Vedanta Resources during its earnings call on June 6 said that refinancing the Oaktree facility would help Vedanta Resources get long-term cheaper financing to repay maturities for the entire financial year ending March 31, 2024, as reported.

Current terms of the make-whole premium clause mean that the company will have to pay over $100 million in the event of prepayment, as reported.

Both sources noted that a strong factor against the tender offer is that it would be unlikely to be called at par, as the $500 million 7.125% notes due 2023 and $400 million 8% senior unsecured notes due April 2023 are indicated in the high 70s. This could send a negative signal to the market, and could trigger a ratings downgrade it is seen as a distressed exchange by ratings agencies, the same sources said.

The same sources felt the option of holding on to their cash could give more comfort to the market than doing the tender offer due to that potential.

Vedanta Resources' cash was $200 million as of June, excluding the recently raised $500 million from State Bank of India and $100 million from DBS Bank, as reported. Vedanta Resources on July 4 said that the company has deleveraged by around $1 billion in the first quarter of fiscal 2023 as part of its earlier commitment to reduce gross debt by around $4 billion over the next three financial years, as reported.

Liquidity Stress Reduced

S&P in a July 14 report said liquidity stress has decreased for Vedanta Resources Ltd. The rating agency expects Vedanta Resources' debt maturities for the rest of the fiscal year to be around $1.3 billion, adding that half of this would be met through further dividends from Vedanta Ltd. while the rest will be refinanced.

S&P in its report estimates Vedanta Ltd. will have consolidated cash of slightly more than $3 billion as of March 2023, of which 80% will sit at its subsidiary Hindustan Zinc Ltd.

Vedanta Resources is looking at raising additional funding from Indian banks, similar to the $700 million it raised in May and June this year from State Bank of India and Canara Bank, the rating agency said in its report. Refinancing the $300 million debt due at subsidiary Twin Star Holdings Ltd. due in December should be relatively easier than the debt at the Vedanta Resources level, S&P added.

Beyond this fiscal year, the next key maturity for Vedanta Resources will be the $900 million of bonds due in April and May 2023, for which the company is likely to look at refinancing options later this year, the rating agency said. Even if Vedanta Resources is unable to raise funding for the 2023 bonds, it should be still able to meet the bond repayments through dividends from Vedanta Ltd., S&P added.

Vedanta Resources’ capital structure is below:

 

– Dipika Lalwani