Award for Innovation in Financing: Vedanta Resources
In early 2016, as commodity markets slumped, Vedanta Resources appeared to be in serious trouble. Rating agencies downgraded the London-listed oil and minerals group debt further into junk territory. CDS spreads on Vedanta briefly reached 1600 basis points, implying a five-year default probability of 80 per cent.
Swift action was required from the company’s financial division. It hired more capital markets professionals, one of which was Arijit Mallick, who joined the company’s corporate finance team in August 2016. Part of the problem was that bond holders didn’t understand how the company could find the cash to honour its obligations. Mallick describes how the company decided to address its upcoming refinancing: “We wanted to demonstrate to the market and investors that we are proactive. We were able to mop up the minority stakes in the oil & gas business in early 2016. This simplified our corporate structure and gave investors better visibility of our cash flows and the cash pockets within the company. On this backdrop and with an improving commodities outlook, we started looking at the bond market for potential issuance.”
Vedanta was not a debut issuer but this was its first bond offering since May 2013. A roadshow ensued, with investor meetings in London, New York, Boston, Singapore and Hong Kong. “Investors were already familiar with the Vedanta name; it was more a case of explaining that this issuance was to proactively improve our credit profile,” explains Mallick.
The holding company, which owns a 50.1 per cent stake in India-listed Vedanta Ltd, as well as a 79 per cent holding in a copper mine and smelting business in Zambia, then set about issuing a series of debt instruments. The first bond was a $1 billion 5.5 year bond in January 2017, together with two tender offers for Vedanta’s outstanding 2018 and 2019 bonds, with an aggregate outstanding amount of $1.95 billion.
As Mallick underlines, the objective was to manage the company’s liabilities, by reshaping its credit profile and pushing out some of the debt maturities, which stood at $2.67 billion in FY 2017. The company’s outstanding debt stood at US$16.3 billion in 31 March 2016 and in FY 2018 is now $15.2 billion. “Our goal was to do a debt-neutral transaction and refinance in a meaningful way.”
Half-way through the refinancing programme in 2017, Vedanta’s zinc business declared a bumper dividend. The holding company received approximately $500 million in cash and was able to buy back outstanding bonds. Mallick says: “This assured investors that we were delivering on our deleveraging strategy and helped us to improve the credit profile further.”
Then in August that year, Vedanta issued a second $1 billion seven-year bond, along with two any-and-all tender offers for 2019 and 2021 bonds, with an aggregate outstanding value of $1.675 billion. It also refinanced debt worth $840 million, including a new $575 million syndicated term loan facility. This drew its refinancing programme in 2017 to a close.
The liability management programme helped to tighten secondary spreads for the firm, lower the cost of debt and extend its average debt maturity, from 2.8 years before the issuance to 4.1 years as of September 2017. The blended cost of debt was lowered from 6.4 per cent in December 2016 to 6.1 per cent after the issuance.
The company has not issued any bonds since 2017 and, as Mallick explains, it doesn’t currently have any refinancing needs: “We have no significant debt maturing next year – just $350 million, which the company can service with its own cash reserves.”
Earlier this year, Volcan Investments, the trust owned by Vedanta’s chairman and founder Anil Agarwal, announced it would buy out the remaining minority shareholders for £778 million, in what was described as a further move to simplify the group’s structure. In October 2018, Vedanta left the London Stock Exchange (LSE), where it had been listed since 2003.
The timing of the refinancing may have been fortuitous given the widening of emerging market corporate bond spreads this year. Option-adjusted spreads for Vedanta’s bond issued in January 2017 were 325bps in December 2017, but increased to 544bps last week, according to data from IHS Markit.
Although the company’s credit ratings remain resolutely in the junk or speculative zone, Vedanta was pleased when S&P increased its rating to B+, followed by a Moody’s upgrade to Ba3 in November 2017. Mallick says: “We are satisfied with the outcome of the bond issuances. Also, the feedback from rating agencies was very positive. We are hoping for a further upgrade but that takes time and we will continue to be proactive and look for the right timing for similar deals in future.”