MUMBAI (Commodity Online): Standard and Poor's Rating Services have raised doubts about the agressive debt-funded growth strategy of London-based mining and metals company, Vedanta and the substantial execution risks at some of the company's large projects under construction.
Standard & Poor's Ratings Services affirmed its 'BB' corporate credit rating on Vedanta Resources PLC. The outlook is stable. At the same time, Standard & Poor's affirmed the 'BB' issue ratings on the company's senior unsecured debt. "We removed the ratings from CreditWatch with negative implications, where they were initially placed on June 26, 2009," according to a S&P press release.
The rating affirmation follows S&P's review of Vedanta's financial policy, growth aspirations, and asset investment/divestment strategies. "The 'BB' rating reflects our opinion of: the substantial execution risks at some of the company's large projects under construction; the location of a sizable portion of the assets in India; Vedanta's aggressive debt-funded growth strategy; and its exposure to volatile London Metals Exchange-traded metals prices and demand level," said Standard & Poor's credit analyst Craig Parker.
Partly offsetting these weaknesses are Vedanta's diversified metal and mining assets; its favorable market position and proximity to the resource-hungry Indian economy; the company's cost-competitive operations, with an increasing reserve base; corrective measures that the company implemented in response to the market downturn; and a financial policy that seeks to maintain sizable cash balances and robust liquidity.
"In our opinion, Vedanta is attempting to complete a sizable and ambitious capital-expenditure program relative to the company's free cash generation. We believe this program poses substantial execution risks at a time when global demand for mining and metals is fragile," said Parker.
Higher debt, coupled with lower operating cash flow, has adversely affected Vedanta's credit metrics. The company's half-year results to Sept. 30, 2009, were aided by increased volumes, better operational efficiencies, higher plant availability, and improved mine management. However, lower commodity prices and by-product realizations resulted in weak credit metrics, with operating margins at 25%, and ratios of adjusted debt to EBITDA of 2.4x, annualized funds from operations (FFO) to adjusted debt of 31%, and adjusted debt-to-capital of 20%.
The stable outlook reflects S&P's expectation that the company will continue to manage its cost structure, cash outflows, and liquidity position to keep its financial ratios within our expectations for the rating (specifically, adjusted debt to EBITDA below 2.5x and FFO to adjusted debt above 35% over the economic cycle).
The rating could come under pressure if: market conditions return to, and persist at their previous weak levels; or major operating disruptions or delays in commissioning new assets occur that significantly weaken the company's overall financial profile. Conversely, the rating could be raised if the company: successfully completes its major capital programs, reducing execution risks; improves its geographic and commodity diversification; and ensures that positive free cash flow is sustainable, enabling the company to remain well above its financial-metric targets, S&P said.
