Vedanta tackles unwieldy corporate structure

The mining company has simplified its corporate structure but Vedanta bondholders are further away from the operating assets.

Vedanta Resources, the London listed miner controlled by Indian billionaire Agarwal Agarwal, has long had a complex corporate structure that has been difficult for investors to understand. Its heavy debt levels have also been a concern among investors and rating agencies.

The company, whose operations span Zambia to South Africa, last month concluded a restructuring that streamlines the company.

“There was a need to simplify the corporate structure,” said Ashish Garg, vice president, corporate finance, in a recent interview with FinanceAsia in Mumbai. “Under the new structure, there is a better alignment of debt and cash,” he added.

Vedanta first proposed a corporate restructuring back in 2008 but the structure it put forward was rejected by the minority investors in unit Sterlite. In 2012, the company hammered out a new proposal - which took effect last month.

Under the new structure, Vedanta created a new entity called Sesa Sterlite, which will hold most of the company's assets including stakes in its cash cows Hindustan Zinc and Cairn India. In turn, Vedanta will hold a 58.3% stake in Sesa Sterlite. According to Garg, the restructuring has also resulted in about $200 million of tax savings annually. 

Vedanta has also transferred the bulk of its debt to Sesa Sterlite. In the past, the company's total debt stood at about $16.5 billion, of which $10 billon was held at Vedanta and the remaining $6.5 billion consolidated among its stable of companies. Following the reorganisation, Vedanta holds only about $4 billion of debt service liability, and the bulk - $13 billion - is held with Sesa Sterlite.

However, as a result of the restructuring, Vedanta's bondholders are further removed from the operating assets, where the cash is generated. In the event of a default, bondholders would find themselves structurally subordinated, particularly if the company starts issuing more debt through Sesa Sterlite.

Moving forward, there are questions as to whether the company will continue to tap the dollar bond markets through London-listed Vedanta Resources, or whether it will start issuing through Sesa Sterlite. However, Garg states that Vedanta is expected to continue to be the vehicle through which the company taps the dollar market, while Sesa Sterlite will tap the domestic rupee market for funds.

“Vedanta would continue to tap the dollar bond market as and when there is a need. Sesa Sterlite had issued about $1 billion worth of Indian rupee bonds and would continue to tap the same to refinance existing loans with an aim to reduce the borrowing costs,” said Garg.

Indian companies face high withholding taxes of about 20% when they issue offshore bonds to fund domestic operations, a key deterrent to issuers.

“There is a high withholding tax and also various restrictions on end use, overall cost and minimum tenor on bonds which makes it unviable or impractical for Indian companies to tap the dollar bond market. Sesa Sterlite being an Indian entity can only look at the dollar bond market within all those constraints,” said Garg. “Vedanta has flexibility to access diverse pool of capital because it is an offshore entity,” he added.

Vedanta has been ambitious in its acquisitions. Its purchase of a 58.5% stake in Cairn Energy for $8.6 billion in 2011 stands out as one of the largest domestic Indian M&A transactions.

While that deal contributed to the high debt levels, it has also helped the company weather a downturn in the commodity cycle. Cairn India contributed about half of its Ebitda during the financial year ended 2013.

“They averted disaster by buying up Cairn India and diversifying out of mining. One only has to look at companies like Hidili to see how it can go wrong to stay solely focused on mining,” said one Singapore-based credit analyst.

He added that the bonds could see potential upside if Vedanta is able to buy the Indian government's minority stakes in Hindustan Zinc and Bharat Aluminium Company. With the Indian government faced with a gaping budget deficit, some feel that they are more likely to sell the stakes in these companies to raise cash.

“We remain keen to buy the government stakes in Hindustan Zinc and Bharat Aluminium Company as consolidation of ownership is a stated strategy,” said Garg. “The government is working at resolving various legal issues for the stake sales” he added.

And while India is on a downward trajectory, Vedanta hopes to lift its ratings. “We believe that the current restructuring has addressed some of the key issues such as the alignment of debt and cash flow and ownership structure,” said Garg.

“Vedanta spent about $20 billion in capex over [the] last 10 years. With the peak capex spend behind us and increasing cash flows from completed projects Vedanta plans to reduce leverage and achieve a strong investment grade credit rating,” he added.

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