VRL spinoff unlikely to affect credit quality: Moody

Moody's Investors Service said Monday that 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 company Vedanta Resources Ltd.

Vedanta Resources Ltd has a VRL 65.2 per cent owned subsidiary Vedanta Ltd and its board of directors have formed a subcommittee to evaluate a potential spinoff of its aluminum, iron and steel, and oil and gas businesses.

Following the subcommittee's evaluation of a potential spinoff, the board could consider other alternatives such as strategic partnerships that would unlock value in businesses for its shareholders.

Three new listed entities with a shareholding mirror that of VDL - a diversified commodities group that produces oil and gas, zinc, iron ore, steel and power through multiple operating subsidiaries - will not affect credit quality unless it proceeds as we expect - because VRL's economic interests in all businesses will remain the same, Moody's said in a note.

The rationale behind a spinoff strategic partnership is to unlock value for shareholders and to help in better transparency in the deployment of cash surpluses from each business towards reinvestment or dividends.

There is no separate disclosure on the free cash flow generation by the different businesses in the current structure. After the spinoff each entity will report its own financials, VRL's consolidated profile will continue to draw the benefits of a diversified business model in keeping profitability despite volatile commodity price cycles, it said.

The VRL group will consist of five listed entities after the spinoff. Four of the three newly listed companies, VDL, and the three newly listed companies will have the same shareholding.

The group's listed zinc subsidiary, Hindustan Zinc Limited HZL, will be 64.9 per cent owned by VDL.

Moody's said that VRL's consolidated credit metrics remain the same because of its economic interest in all businesses, which will be the same as with the spinoff.

It said that VDL's standalone debt will be transferred equitably to the three listed companies. We expect VRL to continue to exercise management control over VDL and HZL, as well as to have the same governance in its management of the newly listed companies. 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 VDL's wholly-owned subsidiary, Cairn India Holdings Limited CIHL Its zinc operations in India are held by VDL's 64.9 per cent owned subsidiary, HZL. The group has zinc mining operations in South Africa through VDL's wholly owned subsidiary Zinc International ZI Its aluminum operations are 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 is encumbered as of September 2021, according to the Securities Exchange Board of India's SEBI definition. Our view is that VRL's shareholding in the three new listed companies may be encumbered upon the spinoff based on the same definition of SEBI. The spinoff will not simplify VRL's complex organisation structure, because it has less than 100 per cent shareholding in its key operating subsidiaries, it said. Creditors at holding company VRL will remain subordinated to claims debt and creditors at the various operating subsidiaries.

The holding company's senior unsecured bonds are rated one notch lower than the B 2 corporate family rating of CFR at B 3, according to the company's senior unsecured bonds.