Fitch Co flags concerns over Vedanta demerger

In September 2023, the mining conglomerate announced plans to demerge five of its key businesses - aluminium, oil and gas, and steel, into separate listed entities.

While Vedanta has said that it aims to value the assets of its demerged entities by their book values, CreditSights believes that it is a relatively straightforward approach as book values are captured at a point in time, "carrying values could be outdated, and may not accurately reflect future profitability and cash flow generation of the business".

Earlier, CreditSights had said that the planned demerger of its other businesses could face major hurdles from minority shareholders and/or creditors, which may delay or derail the deal.

There is uncertainty about how Vedanta will decide and allocate specific debt under which entity and the same applies to its secured rupee bonds issued at the company level. "For VRL's dollar bondholders, the main concern will be what happens to their security over Vedanta's shares," said the report. "The mild advantages that we see for investors of VRL's dollar bonds are in the form of better equity price discovery for individual businesses, potentially higher value unlocked through equity listing and the potential for stake sales to realise cash proceeds which could be applied for deleveraging by VRL."

VRL bonds have rallied since the restructuring of the dollar bonds in January this year, CreditSights sees limited upside in bond prices and expects funding access to remain constrained and its interest burden to remain elevated. Vedanta is still facing funding shortfalls of $850 million and $1.4 billion in FY25 and FY26 respectively. While the debt is manageable for FY25 it is more difficult for FY26. Vedanta could tap into dividend upstreaming and brand fees from the India-listed company and its operating arms, asset and equity stake sales, and or loans.

CreditSights has assigned a low likelihood for its proposed demerger to be completed successfully amid anticipated difficulties in obtaining the necessary creditor approvals. For the merger, it had received approvals from the board of directors in September 2023 to demerge itself into six separate, listed, independent companies. It has said that it was in the advanced stages of engagement with its lenders on the matter and that the process was going smoothly.