Metal Billionaire Plans Biggest Debt Refinance: Corporate India
Vedanta Resources Plc (VED), the oil and metals producer controlled by Indian billionaire Anil Agarwal, is seeking about $3.5 billion of loans in its biggest refinance plan to help extend maturity of the debt.
The London-based company has hired Bank of America Corp., Barclays Plc, JPMorgan Chase & Co., Royal Bank of Scotland Group Plc and Standard Chartered Plc to arrange the financing, according to three people familiar with the matter. Vedanta will raise about $1 billion from banks, while the remaining $2.5 billion will be sourced from the U.S. institutional loans market, two of the people said, asking not to be to be identified before an official announcement.
Agarwal, who paid $8.67 billion to buy oil producer Cairn India Ltd. (CAIR) in December 2011, will use part of the proceeds to pay debt taken to fund the purchase. Vedanta’s interest costs have risen fourfold in the two years to March 31 even as its iron ore and aluminum units in India struggle to boost output amid a crackdown on mining to protect the environment.
“If Vedanta were to refinance, we will review the rating outlook, if that helps reduce the near-term debt maturities, which is one of our major concerns,” Mehul Sukkawala, a Mumbai- based credit analyst at Standard & Poor’s said in a phone interview. “Global interest rates are low and companies are taking advantage to raise funds for refinancing.”
Yields on Vedanta’s 9.5 percent notes maturing July 2018 fell 88 basis points in 2013 to 5.45 percent, a record low, according to Royal Bank of Scotland Group Plc prices.
Vedanta spokesman Gaurav Sharma declined to comment on the refinancing plan.
Vedanta, which has a BB rating, two levels below investment grade by Standard & Poor’s, in August 2011 raised a 12-month facility with a six month extension of $1.57 billion, and a second $1.4 billion, three-year facility.
The latter pays a margin of 325 basis points more than the London interbank offered rate for the first two years, stepping up to 350 basis points in the third, while the former pays a 175 basis point-margin, stepping up to 210 for the last six months, a person familiar with the matter had said then.
Average dollar borrowing costs touched an all-time low of 3.82 percent on March 4, according to HSBC Holdings Plc as the U.S. Federal Reserve holds benchmark interest rates at almost zero and purchases $85 billion a month in bonds.
Vedanta, which owns India’s biggest copper producer Sterlite Industries (India) Ltd. (STLT) and iron ore miner Sesa Goa Ltd. (SESA) in February 2012 said it will combine the companies to reduce the liabilities of the parent. Vedanta has $17 billion of debt, the most by a metal company operating in India.
Sesa Goa may report a second straight year of drop in profit in the 12 months to March 31 after India’s Supreme Court suspended extraction in the western state of Goa pending a probe into violations of mining norms. The ban followed a similar action in neighboring Karnataka in August 2011.
Net income at the company, which was India’s biggest iron ore exporter, may drop 8 percent to 24.8 billion rupees ($456 million), according to a median estimate of 31 analysts compiled by Bloomberg.
“The lack of cash flow from iron ore production may become more acute at a time when Vedanta and its subsidiaries face sizable refinancing requirements,” May Zhong, an analyst with S&P said in a note dated Oct. 1. “This is because iron ore is a key contributor to the cash flows of Sesa Sterlite, a subsidiary that will be formed after a corporate reorganization at Vedanta.”
Vedanta Aluminium Ltd. may cut output at its four year-old aluminum smelter in India because of a shortage of raw material, two people familiar with the matter said in November. Earnings at Vedanta’s aluminum business fell 48 percent in the year ended March 31.
Sesa’s shares gained 0.8 percent to 165.15 rupees in Mumbai, while Sterlite rose 0.6 percent to 99.15 rupees. The benchmark S&P BSE Sensex index dropped 0.2 percent. Vedanta dropped 2.1 percent to 1145 pence at 10:32 a.m. in London.
“If the refinancing allows extension of near-term maturities, it will be positive for equity shareholders since it would reduce the cashflow stress,” said Prasad Baji, an analyst with Edelweiss Financial Services in Mumbai.
Agarwal, who began building his metals empire by acquiring copper-cable producer Shamsher Sterling Corp. from the king of Nepal in 1979, joins Indonesia Eximbank and India’s Amtek Auto Ltd. (AMTK) in planing to refinance dollar-denominated debt.
Indonesia Eximbank has approached banks seeking a $500 million, three-year term loan, according to two people familiar with the matter. Amtek plans to borrow $125 million to refinance an earlier $250 million facility, according to a person familiar with the matter.
North American asset managers, facing a fifth year of near- zero benchmark interest rates, are buying into the high-yield loan market at a record pace. Investors deposited $5 billion into U.S. funds that purchase floating-rate debt last month, adding to the $4.4 billion of inflows in January, according to figures from Bank of America.
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