Asia Loan, Turnaround Deal: Vedanta Resources’ private credit facility and liability management exercise
Vedanta Resources made wise use of a private credit facility to fund a liability management exercise for its US dollar bonds, allowing it to rebuild market access and slash its borrowing costs. That made the facility IFR Asia’s Loan of the Year and earned the broader exercise the Turnaround Deal award.
In late 2023, Vedanta Resources was on the brink of default, but the combination of a well-crafted loan facility and liability management exercise dispelled concerns about the company’s ability to repay maturing debt and put it on an upward trajectory.
The Indian metals-to-mining conglomerate’s bonds were trading at distressed levels and there was serious doubt whether it could meet a US$1bn maturity on January 21 2024. Vedanta Resources had exhausted its distributable reserves at Vedanta Ltd and Hindustan Zinc, so dividends from the operating subsidiaries could not be used to redeem the bond maturing in January.
Funding was needed to break up around US$4.5bn in near-term bond and loan maturities into manageable chunks.
Standard Chartered provided an underwriting commitment for the loan of around 2.5 years, but faced a tight timeline to find investors. Alongside JP Morgan, it also had to persuade bond investors to agree to a maturity extension.
Cerberus Capital Management, Davidson Kempner and Varde Partners came in as anchor investors for a US$1.25bn credit facility, providing certainty of funding for a consent solicitation and tender offer for the bonds, which was launched on December 13 2023.
When the loan closed in early February, it had attracted some 10 lenders, including offshore and India-based credit funds.
The new loan yields an overall return of around 20%, including interest of around 18% per annum. It has access to cashflows, mainly in the form of dividends and annual brand fees from Vedanta Ltd, Hindustan Zinc and other subsidiaries that are upstreamed at the beginning of each financial year. The brand fee payments are ring-fenced and assigned to lenders.
The US$1.25bn loan was also structured with the success of the liability management exercise as a condition precedent to ensure that the private credit investors in the amortising facility maturing in April 2026 would be repaid first and the bond maturities pushed out beyond that date.
Vedanta Resources was able to repay upfront 53% of the principal of its US$1bn 13.875% bond due January 21 2024, 6% of its US$1bn 6.125% notes due August 9 2024 and 16% of its US$1.2bn 8.95% notes due March 11 2025. It was also able to obtain consent from investors holding the three bonds to extend the respective maturities to January 2027, December 2028 and December 2028, raising the coupons of the latter two notes to 13.875%.
Part of the proceeds also went towards repaying around US$250m outstanding from a loan that US investment firm Oaktree Capital Management had provided and which was due in May 2024.
To ensure that Vedanta Resources would cut its debt down to sustainable levels, the loan came with deleveraging milestones and certain mandatory pre-payment events.
Analysts warned that the company could struggle to keep up with interest payments on its private credit facility and extended bonds, but it used the breathing space to improve its capital structure.
Vedanta Resources was able to regain access to the international bond market, raising US$2bn combined from multiple bond offerings between September and November 2024 that delivered significant interest savings compared to its existing notes. Barclays, Citigroup, Deutsche Bank, JP Morgan and Standard Chartered were the global coordinators and lead managers for all the deals.
Even across the course of those three bond outings in three months, there was a drastic change in the company’s story and its ability to bring in investors. In September, its US$900m five-year non-call two bonds were priced at 10.875% alongside a tender offer to tackle the US$470m 13.875% bond due 2027 and its US$1.008bn 13.875% bond due 2028 that were created in the January 2024 liability management exercise. Persuading investors to tender the old paper and take the new notes at a notably lower coupon looked like an uphill battle, as some investors grumbled that the new deal size was too large and the yield was too tight.
But investor demand multiplied and drove the price of the bonds up in the secondary market, allowing the issuer to tap the notes in October for another US$300m.
It was back again in November with an US$800m two-tranche deal. The trade, split between US$300m 10.25% 3.5-year non-call 1.5 and US$500m 11.25% seven-year non-call three tranches, found ample demand despite turbulent market conditions.
Over the course of the year, Vedanta delivered on its deleveraging promises, which allowed the company’s ratings to move steadily upward. In turn, that encouraged a wider group of investors to come into its bond deals, cutting its interest costs and bringing the issuer back in line with other Indian high-yield borrowers.
In late 2023, Moody’s rated Vedanta Resources Caa2 and its senior unsecured bonds Caa3, while S&P rated the company and its bonds CCC and warned of a likely default if the liability management exercise was not completed.
By December 2024, the company had seen multiple upgrades and was rated B1 by Moody’s, and B by S&P, with further upgrades on the horizon.
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