Vedanta Resources has proposed to buy out public shareholders in Vedanta Ltd.
"The proposed privatization is subject to several approvals, including by the Vedanta Ltd board of directors, which is scheduled to meet on May 18. We expect a tender offer only around June or July this year," it said.
Vedanta Resources' ability to refinance its near-term debt maturities, especially the $670 million bond maturing in June 2021, remains the key rating driver.
"A successful privatization of Vedanta Ltd should increase the parent's refinancing options. We may upgrade Vedanta Resources if its liquidity position improves as a result. However, a lack of progress on the refinancing over the next couple of quarters could lead us to lower the rating," the rating agency said.
"Vedanta Resources' inefficient corporate structure and dependence on dividends from Vedanta Ltd for debt servicing have constrained its credit profile," it added.
A successful privatization of Vedanta would improve Vedanta Resources' access to the subsidiary's cash flows. This will be due to more efficient dividend upstreaming (compared to about 50 per cent that is currently paid to minority shareholders).
"Over time, we expect the privatization to improve liquidity at Vedanta Resources and facilitate deleveraging," it said. "The benefits of the increased ownership will mitigate the increase in leverage following the privatization." The exercise, it said, is likely to be debt-funded, and could add about $2.3 billion to Vedanta Resources' debt, assuming the privatization happens at the floor price of Rs 87.5 per share.
The increase in debt is about 15 per cent of adjusted consolidated debt estimate of $17 billion for the company as of March 2020.
"We believe the rise in debt is manageable considering the greater dividends available," it said. "However, if the funding of the privatization is short-term in nature, it could weaken Vedanta Resources' liquidity, especially with other debt maturities in the next 12 months." S&P
said an increase in the tender price above Rs 87.5 per share is another risk, but it expects the company to be prudent while proceeding with the transaction.
Vedanta Resources owns 50.1 per cent of Vedanta Ltd.