S&P downgrades Vedanta Resources credit Rating to 'BB-' on negative outlook

MUMBAI: Rating agency Standard and Poor's downgraded Vedanta Resources one notch to 'BB-' from 'BB' with negative outlook, citing expected weak financial performance for at least next 12 more months because of low oil prices.

S&P said it expects Vedanta's ratio of funds from operations (FFO) to debt to remain weak at about 10% in fiscal 2016, compared with 7.5% in fiscal 2015. However, it expects the ratio to recover to more than 13% in fiscal 2017, assuming a stronger performance of Vedanta's aluminium business.

"Low oil prices have hit Vedanta's cash flows. Any delay in the ramp-up of the company's aluminium production could put additional pressure on the rating," said S&P's credit analyst Mehul Sukkawala in a report.

S&P said that Vedanta's higher zinc production in India, focus on turning around its Zambia copper operations, and a recovery in oil prices should also enhance the company's operating performance. But high operational risks in some businesses ( iron ore and copper in Zambia), and exposure to volatile commodity prices temper these strengths, it added.

Sukkawala said the negative outlook reflects the risk of a delay in improvement in Vedanta's operating performance because of challenges, particularly for the aluminium operations, which could result in the company's ratio of FFO to debt on a proportionate basis not recovering to sustainably above 12% over the next 24 months.

He added that delay in improvement of operating performance could also lower the covenant headroom and lead to refinancing pressure for the company's $2 billion maturities in mid-2016.

Vedanta is a natural resources conglomerate, whose profits have recently been significantly hurt due to meltdown in oil prices.