Fitch places Vedanta Aluminium on RWP on proposed merger

Fitch Ratings has placed India-based Vedanta Aluminium Ltd's (VAL) National Long-Term Rating of 'Fitch A-(ind)' on Rating Watch Positive (RWP). A complete list of rating actions is provided at the end of this commentary.

The rating actions follow Vedanta Resources Plc's (VRPLC, the parent, Issuer Default Rating: 'BB+'/Stable) announcement on 25 February 2012 that VAL will be merged with Sesa Sterlite (SS). This forms part of a recommended merger of Sesa Goa Ltd (SGL) with Sterlite Industries Ltd (SIL) and the proposed consolidation and simplification of the group structure.

The RWP reflects the potential that the ratings on VAL's debt, which will be transferred to SS, could be upgraded post completion of the merger. This is mainly due to an expected improvement in VAL's credit profile, which will be supported by businesses of SIL and SGL after the transfer of VAL's aluminium business to SS. Fitch will, however, analyse the credit profile of VAL's residual business (comprising captive power of VAL and MALCO) and its residual debt once the complete details of the transaction and debt distribution are finalised. The agency expects the credit profile of VAL's residual business to be at or above the existing level given its profitable power operations and strong linkages with SS.

The Rating Watch will be resolved upon completion of the merger, subject to receipt of approvals from various stakeholders.

Fitch's existing rating on VAL benefit from its strong linkages with VRPLC, driven by VAL's expected key role in the parent's global aluminium strategy. The strong linkage is also reflected in VRPLC and SIL guaranteeing over 90% of VAL's total external debt. VAL has also received unsecured loans from SIL and other group companies.

The ratings are, however, constrained by the non-availability of captive bauxite mines for VAL, which results in higher operating costs and weak profitability. VAL's EBITDA margin declined to 14.4% in FY11 (the full year to end-March 2011) from 24.1% in FY10. Also, only a small part of VAL's aluminium production is likely to be in the form of value-added products.

Rating actions on VAL:

- National Long-Term Rating: 'Fitch A-(ind)'; placed on RWP

- Proposed INR60bn non-convertible debentures: 'Fitch A-(ind)(exp)'; rating placed on RWP

- INR5.0bn non-fund based facilities: 'Fitch A-(ind)'/'Fitch A2+(ind)'; ratings placed on RWP

- USD125m non-fund based facilities: 'Fitch A-(ind)'/'Fitch A2+(ind)'; ratings placed on RWP

- INR2bn fund-based working capital facilities: 'Fitch AA(SO)(ind)'; rating placed on RWP

- INR8bn non-fund based working capital facilities: 'Fitch AA(SO)(ind)'/'Fitch A1+(SO)(ind)'; ratings placed on RWP

- USD500m term loan: 'Fitch AA(SO)(ind)'; rating placed on RWP

- INR161.5bn project finance facilities: 'Fitch AA(SO)(ind)'; rating placed on RWP