The merger of Vedanta Ltd (VL: ‘IND AA’/Negative) and Cairn India Ltd (Cairn) will have a positive impact on the final capital structure and overall liquidity, while the credit rating impact on VL is neutral, says India Ratings and Research (Ind-Ra). The agency had already factored in the completion of the merger by 1HFY17.
The Vedanta-Cairn merger will reduce the structural subordination, reduce leverage, enable access to cash available with Cairn (March 2016: INR200bn) and its future inflows. Ind-Ra expects the cash balance to be utilised for reducing debt, including the inter-company loan payable to the Parent (Vedanta Resources Plc) of around INR67bn as at end-April 2016. The repayment of this inter-company loan will also ease liquidity and leverage at the parent level.
VL’s proportionate net leverage level has substantially increased in FY16 to 3.7x from 2.9x as of FY15. The agency expects the proportionate net leverage to remain elevated in FY17. The redeemable preference shares issued as part of the offer will add INR30bn to the outstanding debt. VL will also assume contingent liabilities estimated at INR205bn, relating to Cairn India’s tax dispute. To arrive at the proportionate net leverage, Ind-Ra has consolidated the key financial items of its subsidiaries, namely Cairn India Limited, Hindustan Zinc Limited and Bharat Aluminium Company Limited in the proportion of its holding in these companies.
Cairn’s cash balance and future cash flows will also ease refinancing requirements. VL has scheduled debt maturity of INR107bn in both in FY18 and FY19. The agency expects Cairn to generate EBITDA of INR34bn in FY17 compared to INR35bn in FY16, assuming Brent at USD45/bbl.
VL has revised its offer to issue four redeemable 7.5% preference shares of face value of INR10/each (earlier 1:1), along with one equity share in VL (same as earlier). VL now awaits regulatory approvals and shareholders’ approval which is slated for September 2016.
The key risks to the timely completion of the Vedanta-Cairn Merger may primarily arise from an unexpected opposition from the minority shareholders and delays in obtaining regulatory approvals. VL will need approval from the Ministry of Petroleum & Natural Gas for vesting of Cairn’s production sharing rights to VL and approval from the Foreign Investment Promotion Board for the issue of redeemable preference shares to non-resident Cairn India shareholders, among others.