Mumbai-listed Vedanta Ltd’s proposal to spin off key businesses into separate listed companies is unlikely to affect the credit quality of the firm’s parent Vedanta Resources Ltd, Moody’s Investors Service said Monday. Vedanta Resources Ltd’s (VRL) 65.2 per cent owned subsidiary Vedanta Ltd last week announced that its board of directors have formed a subcommittee to evaluate a potential spinoff of its aluminium, iron and steel, and oil and gas businesses into separate listed companies.
Following the subcommittee’s evaluation of a potential spinoff, the board could also consider other alternatives such as strategic partnerships that would unlock value in the businesses for its shareholders.
“The spinoff, which will result in three new listed entities with a shareholding mirroring that of VDL – a diversified commodities group that produces oil and gas, zinc, aluminium, iron ore, steel and power through multiple operating subsidiaries – will be unlikely to affect credit quality – assuming it proceeds as we currently expect – because VRL’s economic interests in all businesses will remain unchanged,” Moody’s said in a note.
The rationale behind a spinoff/strategic partnership is to unlock value for its shareholders and to help in better transparency in the deployment of the cash surpluses from each business towards reinvestment or towards dividends.
“In the current structure, there is no separate disclosure on the free cash flow generation by the different businesses. Whereas after spinoff each entity will report its separate financials, VRL’s consolidated profile will continue to draw the benefits of a diversified business model in maintaining profitability amid volatile commodity price cycles,” it said.
Following the spinoff, the VRL group will comprise five listed entities. Four of them, VDL and the three newly listed companies will have the same shareholding.
The group’s listed zinc subsidiary, Hindustan Zinc Limited (HZL) will continue to be 64.9 per cent owned by VDL.
Moody’s said VRL’s consolidated credit metrics remain unchanged because its economic interest in all of its businesses will be the same with the spinoff.
“We expect VDL’s standalone debt to be transferred to the three listed companies equitably,” it said. “Importantly, we expect VRL to continue to exercise management control over VDL and HZL, and for the same governance in its management of the newly listed companies.”
For instance, the newly listed companies are expected to distribute 30 per cent of their annual profit through dividends, aligned with the dividend policies of VDL and HZL.
The group’s oil and gas business is held at VDL and at VDL’s wholly-owned subsidiary Cairn India Holdings Limited (CIHL).
Its zinc operations in India are held at VDL’s 64.9 per cent owned subsidiary HZL. The group also has zinc mining operations in South Africa through VDL’s wholly-owned subsidiary Zinc International (ZI).
Its aluminium operations are run as a division at VDL and through VDL’s 51 per cent owned subsidiary Bharat Aluminum Company Ltd (BALCO).
“VRL’s entire shareholding of 65.2 per cent in VDL was encumbered as of September 2021 per the Securities Exchange Board of India’s (SEBI) definition,” Moody’s said. “In our view, VRL’s shareholding in the three new listed companies may also be encumbered upon the spinoff based on the same SEBI definition.”
The spinoff, however, will not simplify VRL’s complex organisation structure because it has less than 100 per cent shareholding in its key operating subsidiaries, it said, adding creditors at holding company VRL will remain subordinated to claims (debt and creditors) at the various operating subsidiaries.
“As such, the holding company’s senior unsecured bonds are rated one notch lower than the B2 corporate family rating (CFR), at B3,” it added.
