New Delhi: Ratings agency Moody's Monday said metals and mining major Vedanta Resources' over Rs 19,000 crore impairment in Cairn India is credit negative as it implies a longer pay back period.
Last month, Vedanta said in the January-March quarter it wrote off Rs 19,180 crore as non-cash impairment charge for acquisition goodwill of Cairn India following slump in global crude oil prices.
"The USD 3.1 billion impairment is credit negative for Vedanta Resources Plc (Vedanta, Ba1 negative), which owns 62.8 per cent of Vedanta Ltd, because it implies a longer payback period for the acquisition and increases the challenge of repaying USD 4.4 billion of acquisition debt financing from its operating cash flow," Moody's said in a statement.
Vedanta Ltd owns 59.9 per cent of Cairn India, which it purchased in 2011.
Vedanta Ltd's massive impairment - one of the biggest in corporate India's history and 35 per cent of the original acquisition price - highlights the eroded value of its oil and gas assets since 2011, it added.
The impairment reflects the high price that Vedanta paid for Cairn India at the peak of the oil and gas cycle, when Brent crude prices exceeded USD 100 per barrel. On Friday (May 1), the closing price was USD 66 per barrel, Moody's said.
"Although the non-cash write-down will not immediately affect key credit ratios, it reflects the lasting effect of the lower oil prices on Vedanta's business profile, which underpinned our change to its rating outlook to negative from stable in January," it added.
Vedanta's investments in Cairn India will take longer to recoup. Since its acquisition in December 2011, Vedanta has received some USD 250 million in upstreamed dividends from Cairn India, which have been used to service the acquisition debt.
"As reflected by the impairment, Vedanta's investment in CIL will reduce cash flow, making it more difficult for Vedanta to pay down debt," Moody's said.
Moody's expects Vedanta's leverage to remain above the 3.5x-4x range for at least the next two years.
The sharp drop in crude oil prices by almost 50 per cent to an average of USD 56 per barrel since January 2015 from USD 100 at 31 March 2014 has eroded Cairn India's EBITDA by 60 per cent to USD 1.4 billion in the fiscal year ended 31 March 2015 from USD 2.4 billion in fiscal 2014.
"Without accounting for a USD 3.2 billon disputed tax bill dating to 2007, we expect its debt/EBITDA to climb above 4.3x in fiscal 2016 from around 4x in fiscal 2015 and 3.3x in fiscal 2014," it added.
Earlier this year, Cairn India had announced slashing its capital expenditure by 60 per cent to USD 500 million for fiscal 2016, from USD 1.2 billion, which would help it minimise the effect on its weak operating cash flow generation, Moody's said.
"But Vedanta's complex holding structure, with most of the debt issued by entities that do not generate cash, makes debt servicing and repayment solely reliant on indirect upstreaming of dividends from Cairn India and Hindustan Zinc Limited (unrated)," it added.
As a result, negative pressure on Vedanta's Ba1 rating continues to build and sets high expectations from its non-oil businesses to perform to partially mitigate the effect of low oil earnings from Cairn India, the ratings agency said.
