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Indian lenders are unlikely to clear the vertical split of BSE-listed Vedanta Ltd in a hurry, considering that the demerger would reduce the fungibility of cash flows across businesses and increase their volatility, according to analysts.
The demerger plan, which would result in six separate listed entities, would require approval from shareholders, lenders and other statutory bodies.
“We believe that a separate listing of different businesses would reduce the fungibility of cash flows across businesses and increase the volatility of cash flows.
"This could make lenders’ approval challenging, given the elevated debt levels, with net debt to earnings before interest, tax, depreciation, and amortisation (Ebitda) at over four times in 2024-26 for Vedanta Ltd (excluding Hindustan Zinc),” a report by Kotak Institutional Equities said on Tuesday (October 3).
Senior bankers, when contacted, said that Vedanta has not yet formally approached them with the demerger proposal.
Lenders plan to scrutinise the rationale for the recast, structural details, business plans for each unit, approach to financial management and funding.
“The prudence in financials is crucial,” said a senior public sector bank official.
Another bank executive noted that the group was looking at delisting at one time, and is now going to carve out businesses and list them.
It would be of interest for banks to understand how and why there is a change in its stance.
Vedanta underwent a tedious process of merging various listed entities, with the merger of Sesa Goa and Sterlite in 2012 and then with SesaSterlite and Cairn India in 2017.
Vedanta’s decision to demerge and separately list different business units to unlock value contradicts the rationale for past corporate actions, the report said.
But the dollar debt of Vedanta Resources, the holding company of Vedanta Ltd, due in March 2025, fell 1.5 cents on October 3.
It is poised for its steepest daily drop since August 31, according to Bloomberg.
A note due in April 2026 fell by 1.6 cents.
Vedanta did not comment on email queries.
Chairman of Vedanta group Anil Agarwal said it plans to complete the sale of its steel and iron ore operations by the end of FY24.
This would help it to reduce debt.
The group has lined up the required finances to repay debt due in January and August.
“About $1-billion payment will be due in January and another $500 million-$600 million in August,” Agarwal told a TV channel.
The company has kept both refinancing and repayment options on the table for the bondholders.
Agarwal said the company is looking at all options to reduce debt and the sale of steel and iron ore operations will help in that.
Analysts of CreditSights, an associate of Fitch, said it does not believe that the reorganisation addresses Vedanta’s debt obligations as the consolidated debt across all its proposed entities will still remain the same.
“While we see the business reorganisation proposal as a positive for Vedanta’s equity story, we are not that positive from a credit perspective.
"Overall, we see a modest credit negative impact for bondholders,” CreditSights said in a report.
“There are still a few uncertainties and unanswered questions around the new company structure — the role of VRL and the intermediate holding companies, the treatment of investors of dollar bonds issued out of VRL and the intermediate holdcos, the composition of the Vedanta group and the outcome for the share collateral for Vedanta's secured bonds,” it said.
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