Tue 11/17/2020 07:27 AM
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Vedanta Resources Ltd. remains in talks with some of its key relationship banks over financing to bridge a series of repayment deadlines, with bank loan financing being the preferred near-term solution, said two sellside sources and a buysider. Using further inter-company loans to refinance debt could trigger a ratings downgrade, according to one of the first three sources and two separate sources.

Multiple buyside sources and holders of Vedanta Resources’ $670 million (outstanding) 8.25% due June 2021 notes said that a USD bond issue is strongly tipped as a solution to refinancing the notes. Vedanta Resources also has a $414 million Standard Chartered loan due December 2020 - and remains in talks with StanC about a potential rollover of the loan according to three of the above sources - and an outstanding around $350 million loan due September 2021 at the Volcan Investments level which was used to fund the take private of Vedanta Resources from the London bourse.

The dollar bond is one of a range of potential options under consideration, as Vedanta mulls its next move after the failed October privatisation of Indian entity Vedanta Ltd. Vedanta Resources had attempted to privatise Vedanta Ltd. in order to access higher dividends from Hindustan Zinc, which it currently shares with public shareholders who hold 49.5% of the company.

However, buyside sources also note that problems achieving a corporate reorganisation that would free up cash to pay down debt could see the commodities company resort to traditional bank loans and intercompany loans to refinance upcoming maturities in the absence of further access to the capital markets.

Buyside sources worry that inability to tap external sources of funding to repay short-term maturities could prompt a downgrade, increasing difficulties for the company to tap bank funding in the loan markets, or to issue into USD bond markets. Vedanta Resources is rated B1 with a possible downgrade by Moody’s and B- by Fitch with a negative outlook.

Vedanta Ltd. Chief Executive Officer Sunil Duggal said on a Nov. 6 earnings call that options to manage debt at parent Vedanta Resources Ltd., included using the company’s cash flows, which is “looking good at almost a billion dollars a quarter run rate,” refinancings, and sale of assets or any other “strategic option if the need arises,” as reported.

On the same Nov. 6 earnings call, Chief Financial Officer Arun Kumar said that the company had outstanding inter-company loans of $956 million. The loans are unsecured, pay interest of 7% and have an average maturity of 2.2 years, as reported.

Loan Facilities

Facing maturities of $670 million 8.25% notes due June 2021 and the $414 million StanChart loan due December 2020, Vedanta is exploring various scenarios to deal with its upcoming debt maturities, according to one of the sources and a buyside source.

The company is in talks with Standard Chartered Bank on the $414 million loan provided to subsidiary Twin Star Holdings Ltd. but also with various relationship lending banks as it assesses its options.

Vedanta through its subsidiary Twin Star entered into a bridge loan facility for $600 million with Standard Chartered in December 2019, according to the offering circular of 2023 notes. The facility was due in June 2020, was extended by six months and the amount outstanding under this facility as at June 30, 2020 was $414 million, the OC shows. The facility pays a margin of LIBOR+ 400 bps which stepped up to L+500bps in March 2020, the OC states.

Vedanta also partly repaid its $180 million term loan facility provided by Yes Bank to subsidiary Vedanta Resources Jersey II, which matured in September, with the remaining outstanding amount extended by one year, according to the sellside and a buyside source.

According to Reorg’s analysis, Vedanta Resources and Vedanta Limited debt maturities as of March 31, 2020 is outlined as below.
 


Market participants looking at options available to the company mainly narrowed in on the need to acquire publicly held shares of Vedanta Ltd.

Two separate buyside sources highlighted a possible scenario which could include a buyback of an up to 5% stake of the remaining 49.5% of Vedanta Ltd. 's publicly held shares using around $1.2 billion (INR 90 billion) dividends the company will receive from subsidiary Hindustan Zinc. The move would increase their holding to over 60% by April 2020, at which point they could attempt a privatisation again, the sources said. Vedanta Resources can buy back 5% shares of Vedanta Ltd. by March 2021 and another 5% in April 2021, the sources added. An acquirer, along with persons acting in concert (PACs), holding 25% or more shares or voting rights in a target company is allowed to acquire additional voting rights of up to 5% within a financial year on a gross basis without making an open offer, according to SEBI guidelines.

A third buysider suggested the company could extend its near-term debt ($414 million loan from Standard Chartered due December 2020 and its outstanding $670 million 8.25% notes due June 2021) and buy back the shares of Vedanta Ltd., to manage cash leakage due to dividend payout to public shareholders of Vedanta Ltd. If the extensions are not achieved, then the company needs to secure loans to refinance its nearer-term maturities.

A sellside source noted that if Vedanta Resources’ stake in Vedanta Ltd. was upsized to 75% through an open offer, the additional dividends could be used to redeem the notes due July 2021. The remaining bond maturities between 2022-2026 would then be refinanced through capital market transactions.

Vedanta Resources' capital structure is shown below.
 

Standard Chartered declined to comment. Vedanta did not respond to requests for comment.

-- Dipika Lalwani, Nidhi Pandurangi
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