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Vedanta: 7 Investor FAQs
Lakshmanan R, CFA, FRM - Head of South & Southeast Asia Corporates
Jonathan Tan Jun Jie - Analyst, South & Southeast Asia Corporates
EXECUTIVE SUMMARY
- While our net present value estimates suggest price upside across VRL’s 2024 and 2025 bonds assuming our base case scenario of a successful bond restructuring occurs, we acknowledge final restructuring terms are still unclear (hence no preference for any bond in the complex at this juncture). We continue to draw comfort from management’s firm willingness to repay its debts in full, as well as the fact that VRL still has several funding levers to plug its ~$450 mn FY24 residual funding shortfall.
- The FAQs are based on our discussions with more than 7 investors closely covering the Vedanta story, mainly from sell-side trading desks, and asset managers.
- We address 7 key frequently asked questions (FAQs) on VRL’s bond restructuring plans: 1) expectations of the bondholders involved in the restructuring; 2) impact of proposed demerger on restructuring; 3) reasons for VRL’s difficulty in obtaining bank loans; 4) net present value estimates of the 3 $ bonds under consideration for restructuring; 5) our base case restructuring scenarios; 6) key bond terms to consider; 7) cross-default considerations.
- Please see the body of the note for our in-depth thoughts on each question.
We have compiled 7 FAQs posed by market participants with regards to Vedanta’s $ bond restructuring.
1. What is the game plan by the bondholders of 2024, 2025 bonds involved in the debt restructuring?
We believe the focus of the 2024 and 2025 bondholders is to negotiate for the best possible terms in the event of a debt restructuring, while being realistic. At this point, we think most bondholders acknowledge that a maturity extension of the 2024 and 2025 bonds may be an eventuality given Vedanta’s tight near-term liquidity.
We anticipate bondholders will push for: 1) Having the maturity of the restructured 2024 and 2025 bonds fall ahead of the non-restructured Apr-2026 bonds; 2) Extending the maturity of the 2026 bond by three years too if the above option were unsuccessful, such that all bondholders across the bond complex are treated equally and fairly; 3) Having no material reduction in coupon rates; 4) Continue to receive coupon payments in cash and not payments-in-kind; 5) Having no material principal haircut; 6) Security package; and 7) A heftier cash upfront payment (latest market rumors were 50% for Jan-2024, 15% for Aug-2024, and 10% for Mar-2025).
From our discussions with diverse market participants, we have gathered that secured creditors intend to form a separate group from unsecured creditors to aggressively pursue a better package reflecting their secured status. As a recap, the Jan-2024 and Mar-2025, which are guaranteed by intermediate holding companies Twin Star Holdings Ltd (TSHL) and Welter Trading, in addition to a guarantee from ultimate holding company VRL, are backed by shares of Indian subsidiary, Vedanta Ltd (VEDL); whereas the Aug-2024 is unsecured. Last we heard, Oaktree Capital and Avenue Capital (holders of undisclosed amounts of the Jan-2024 and Mar-2025) appointed London-based Cleary Gottlieb Steen & Hamilton LLP as their legal advisor to facilitate the negotiations with VRL. They are said to be asking for an upsized 75% cash upfront payment for the Jan-2024 and a higher unknown amount for the Mar-2025 too.
2. What does the proposed demerger of Vedanta Limited mean for the debt restructuring?
We highlight that our base case scenario is for any debt restructuring to conclude ahead of the completion of the demerger. We maintain our view that conducting a restructuring ahead of the demerger would come with its own set of hurdles that include: 1) For private credit lenders who were rumored to be syndicating a $1 bn 2.5-year loan to fund the cash upfront portion of the bond restructuring, there is uncertainty over where the loan collateral will lie after the proposed demerger; 2) For loans with securitization against brand fees, it is uncertain whether the newly demerged units will continue paying brand fees to the VRL holdco post the demerger; 3) For the Jan-2024 and Mar-2025 bondholders whose bonds are secured by shares of VEDL, it is unclear what happens to that collateral after the demerger (i.e. will it split into share collateral over each of the 6 future listed units, or morph into something entirely different?).
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