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Vedanta cash reward for zinc buyout boosts bonds

LiveMint logoLiveMint 06-06-2014 Abhishek Shanker

Mumbai: Billionaire Anil Agarwal’s Vedanta Resources Plc is winning back the bond market’s confidence as it nears an acquisition that would unlock $4 billion in cash.

The extra yield over treasuries on 2023 dollar debt of the mining and energy group, which reported a $196 million annual loss last month, dropped 106 basis points this quarter to 397, the least since the notes were issued in May 2013, according to data compiled by Bloomberg. The average spread on similar Indian securities declined 35 basis points to 238, an index compiled by JP Morgan Chase and Co. shows.

Standard and Poor’s and Moody’s Investors Service raised their credit outlooks this quarter for Vedanta, citing the planned acquisition of Hindustan Zinc Ltd that would boost cash reserves. The reopening of the company’s Indian iron mines that were shuttered amid probes into environmental breaches will help revive its finances, the credit assessors said.

“They are coming out from the worst,” Alan Greene, a Singapore-based analyst at Moody’s, said in a 4 June telephone interview. “With almost a complete hold of Hindustan Zinc, it would be able to use its cash. Last year’s figures were probably the bottom and this year should be better as they start getting some production from iron ore and aluminium and as they keep pumping more oil.”

Vedanta Resources spokeswoman Roma Balwani didn’t answer a call made to her cell phone or reply to an e-mail seeking comment.

Reducing debt

“Vedanta, which hired Tom Albanese as chief executive officer from Rio Tinto Group in March, is stepping up efforts to revive finances that were hurt amid mining disruptions and last year’s rupee slide that inflated foreign debt payments.

The company reduced net liabilities by $2.1 billion in the two financial years through March and has cash and equivalents of $9 billion and an additional $1.5 billion of unutilized credit facilities,” chief financial officer D.D. Jalan said in a 15 May conference call with analysts.

Sesa Sterlite Ltd, a Vedanta unit that already owns 64.9% of Hindustan Zinc, is seeking to acquire the government’s 29.54% holding in the company. The cabinet in January approved the sale of the stake. Prime Minister Narendra Modi’s government, elected last month, is seeking to get the shares valued, an official said last month, asking not to be identified as the information isn’t public.

Vedanta is also seeking to boost its stake in Bharat Aluminium Co., in which it holds 51%, by acquiring the 49% owned by the government.

‘Deleveraging’ focus

“In terms of balance sheet management, our focus remains on using our strong free cash-flow generation to drive deleveraging,” CFO Jalan said in the conference call. “Planned stake purchases would boost fund reserves, improving our ability to decrease debt further,” he said.

Vedanta’s long-term borrowings were equivalent to 312% of its equity capital, compared with a 52% average for 15 Bloomberg peers. The company’s earnings before interest, taxes, depreciation and amortization, or Ebitda, was 3.3% times its interest expenses, compared with an average 8.6% times for peers.

“Sesa Sterlite restarted iron ore mines in the southern Karnataka state in December after getting clearance from the Supreme Court. In April, the nation’s top court lifted a separate ban on mining in the state of Goa. Vedanta also plans to ramp up aluminium production in India,” CEO Albanese said in March. The company gained access to the country’s biggest onshore oilfield in 2011 after Chairman Agarwal bought a controlling stake in Cairn India Ltd. for $8.67 billion.

Improving outlook

“Currently their financial ratios are weak but this should improve from here because of operating performance and the fact that they don’t have any significant capital expenditure plans,” Mehul Sukkawala, Singapore-based director of Asia- Pacific corporate and infrastructure ratings at S&P, said in a phone interview on 4 June. “Operations will stabilize on the iron-ore front and performance will improve because of higher aluminium output. We expect cash flows from oil and zinc operations to be maintained.”

This year’s rebound in the rupee, fuelled by optimism that India’s most decisive election in 30 years will revitalize policies to improve the economy, may cut foreign-debt costs for Vedanta. The rupee rallied 4.2% in 2014, the biggest advance among the 11 most-traded Asian currencies, to 59.33 per dollar, while 10-year government bond yields declined 30 basis points, or 0.3 percentage point, to 8.53%.

Vedanta’s credit risk is falling. The cost to protect the company’s debt against non-payment for five years declined 20 basis points in 2014 to 430, according to data provider CMA.

“A new government at the centre has created big hopes that economic growth and investments will revive and if that were to happen, Vedanta will stand to gain,” Abhishek Shukla, a Bengaluru-based analyst at Societe Generale SA, said in a phone interview on Thursday. Bloomberg

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