Weakness in outlook for commodity sector and fears due to metals producer Vedanta Resources Ltd’s balance sheet strength seems to have spooked buyers of the company’s corporate bond paper.
Yields on Vedanta Resources’s 1-year corporate bond have shot up in six months, from 6.628% at the beginning of November 2019 to 60.296% at the end of April.
Indian mutual funds, which hold over ₹16,000 crore of corporate bonds of the Indian subsidiary Vedanta Ltd, are looking to sell some of their exposure to the commodity player.
With commodity prices expected to be under pressure this year, Vedanta Ltd could face a rough year ahead.
In an April 2020 outlook report, the World Bank has predicted a prolonged slump in the global commodity market amidst the covid-19 pandemic because of transport disruptions and slowdown in economic activity affecting global demand. US crude oil prices briefly turned negative for the first time in April on a supply glut and lack of adequate storage. The prices of most industrial metals have fallen too, with the largest declines being seen in copper and zinc, two key metals for Vedanta. The World Bank predicted that metals prices will drop 13% overall this year, while crude oil is expected to average at $35 a barrel, down by about 43% from last year. Vedanta, which produces copper, zinc, iron ore, aluminium and crude oil in India, is expected to take a sharp hit on its revenues in a weak commodity market.
The other concern appears to be about Vedanta Resources’s ability to refinance $1.9 billion of debt securities which mature in September 2021. In March, international credit ratings agency Moody’s placed Vedanta Resources Ltd, the parent company of Vedanta Ltd, under review for downgrade because of the impact of the COVID-19 outbreak on oil and base metal prices and its refinancing ability.
“The review for downgrade reflects our expectation that low oil and base metal prices will significantly strain Vedanta’s financial metrics, at least through the fiscal year ending March 2021,” Kaustubh Chaubal, Vice President and Senior Credit Officer, Moody’s, and the agency’s lead analyst on Vedanta, said in his report.
“Moreover, the review highlights the heightened refinancing risk surrounding the holding company’s around $1.9 billion of debt securities, which will mature through September 2021.”
A spokesman for Vedanta Limited said the company achieved capacity utilisation of above 80% in April, given the ‘essential’ nature of its business. “We continue to have a very robust cash position with a treasury cash investment of Rs. 35,000 crore at this very point of time, of which around ₹15,000 crore is invested in mutual funds. Our Net Debt to EBITDA ratio is at less than 1.0x, and is probably the best in Indian large corporate space. The global bonds are issued by the parent entity of Vedanta Ltd, which by nature trade in a relatively illiquid market, with the secondary levels possibly registered by some distress sale of an investor needing cash rather than a planned exit, and isn’t reflective of the underlying strength of the subsidiary.” Further, he said the Indian mutual fund industry supports Vedanta Ltd and is invested in both its equity and debt (a large part of which is secured NCDs). “Overall, our large diversified asset base, attractive commodity mix, low cost of operations and robust balance sheet, have always ensured that we remain unimpacted from temporary commodity cycles, including the current one. ”
“The yield to maturity on Vedanta’s 1-year paper is clearly reflecting the nervousness of the market; 60% yield is not normal, COVID or no COVID,” a lender to the commodities conglomerate told Mint on condition of anonymity. “Domestically, large banks have been bearish on the group for a few months and have sold their positions. Mutual funds, which hold a considerable amount of the domestic debt, are trying to sell this paper now.”
The yield on a bond rises when its price in the market falls. A rising yield means there are more sellers than buyers for the company’s bond in the open market.
In total, mutual funds have an exposure of ₹16,056 crore to Vedanta Ltd, as per data from Rupeevest, an online mutual fund platform, as of 31st March 2020.
Mutual Funds have faced a string of defaults in their debt portfolios since late 2018 such as IL&FS, DHFL, Reliance ADAG, Sintex BAPL and Yes Bank, and are nervous about the strength of their investments. As per CRISIL data, about ₹1,000 crore of investor money already sits in segregated portfolios of mutual funds. These portfolios are created in lieu of defaulted debt or debt downgraded below investment grade to allow investors to exit the remaining ‘healthy’ portion of schemes without giving up on the chance of recovery. Debt mutual funds have also been facing significant redemption papers due to investor concern about debt defaults.
