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Singapore, December 21, 2010 — Moody’s placed the Ba1 corporate family rating and Ba2 senior unsecured rating of Vedanta Resources plc on review for possible downgrade on 17th August 2010, after it had announced the proposed acquisition of a controlling stake (of up to 60%) in Cairn India Ltd. for $9.6 billion or less. At this stage, the review process has not reached a conclusion as further regulatory approvals and agreements, which could have a material impact on the final shape of the transaction, are still outstanding.
The key approvals outstanding should be cleared by the end of January,2011. These pertain to Government consent in respect of the productionsharing contracts of Cairn India’s blocks, and clearance from the Securities and Exchange Board of India (SEBI) in respect of Sesa Goa’sopen offer for Cairn India shares. Vedanta is seeking to use its listed subsidiary, Sesa Goa Ltd. (55.7%-owned), as a funding vehicle to acquire a 20% stake in Cairn India, by drawing on its cash on hand and raising short-term INR borrowings.
Good progress has been made in the area of financing the purchase of theremainder (of up to $6.8 billion), with some $6.0bn of debt facilities organized at the Vedanta Resources level.
Moody’s notes the proposed addition of debt at the Parent company level and the implications this has for subordination within the Group, and the standalone rating of the relatively thinly capitalized Parent, already set at one notch below the corporate family rating.
A “senior secured term loan facility” of up to $3.5bn comprises a Tranche A of $1.85 billion, with a tenor of 12 months plus a 6 months rollover (at Vedanta’s option) and a Tranche B of $1.65 billion with a three year term. The security includes the shares in the offshore borrowing SPV,owned and guaranteed by Vedanta, which may or may not be able to pledge the shares of Cairn India.
A further, up to $1.5bn, “bridge to bond” facility shares the security package, but this falls away when the take-out notes are issued, or conversion into a rollover loan occurs, leaving the $1.5bn ranking pari passu with Vedanta’s existing senior unsecured bonds. Vedanta isrequired to go-to-market and the new notes can be issued after thirty days from drawdown. There are then coupon step ups, but in any event, the bridge converts to 5 year, roll-over loans after three months, which can in turn be exchanged for notes.
A “bridge to equity” segment of $1.0bn also shares the security package. Notionally with a tenor of 18 months, Vedanta is hoping that the listing of Konkola Copper Mine (KCM) deferred from 2010, will take place in early 2011, in order to reduce the amount borrowed. An interesting aspect of this segment is that, as a last resort, Vedanta could be required to issue shares to repay this loan.
The remaining $800 million, if required, will be sourced from a 4 to 5 year term loan. There are no further details on this element.
Moody’s notes that the marginal interest rate to be charged on some $3.1 billion of the loan facilities is dependent on the rating level assigned to Vedanta.
Trading performance at Vedanta and Cairn India, continues to meet Moody’s expectations. Given the continued strength of commodity prices, the period of elevated financial risk at Vedanta, post completion of the acquisition, is likely to be commensurately shorter than initially envisaged by Moody’s. Such trends will be reflected in the ratings when the review is closed.
The last rating action was taken on 17 August 2010 when Moody’s placedVedanta’s Ba1 corporate family and Ba2 long-term senior unsecuredratings on review for possible downgrade following the company’s announcement of an offer to acquire a majority 51%- 60% interest in Cairn India Ltd at an estimated cost of over USD8.5 billion.
The principal methodology used in rating Vedanta is Rating Methodology on Global Mining Industry published in May 2009, and available onwww.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody’s website.
Headquartered in London, UK, Vedanta Resources plc is a metals and mining company focusing on integrated zinc, aluminum, copper, iron ore mining and commercial power generation. Its operations are predominantly located in India. It is listed on the London Stock Exchange and is 59.67% owned by Volcan Investments Ltd.