REVIEW: Vedanta sells US$1bn high-yield bond ahead of merger

Indian mining and energy group Vedanta Resources has priced a US$1bn 5.5-year senior unsecured bond ahead of its planned merger with cash-rich Cairn India.

The 144A/Reg S notes priced at a yield of 6.375%, from guidance of 6.75% area. They are expected to be rated B3/B+ (Moody's/S&P).

The deal attracted orders of more than US$2.3bn from around 200 accounts. The US bought a hefty 40%, followed by EMEA accounts with 38% and Asian investors with 22%.

By investor type, fund managers bought 92%, private banks bought 5%, and banks and others took a combined 3%.

Vedanta's existing 2021s and 2023s were seen at 6.06% and 6.70% at the start of bookbuilding, but moved throughout the day and were as much as 25bp tighter by the time final guidance came out. Pricing was around the mid-point of the two, with little or no premium paid.

"NDRC approvals have just kicked in for lots of Chinese issuers, so we are going to see the landscape for new issue premiums change after Chinese new year," said a source close to the deal, referring to regulatory clearances given to Chinese issuers by the country's National Development and Reform Commission.

Apart from the general recovery in commodities prices, investors also had to consider Vedanta's planned merger of subsidiary Vedanta Ltd with oil and gas explorer Cairn India (CIL).

"In our view, Vedanta will be more akin to a BB rated company once the merger with Cairn India is completed," wrote Trung Nguyen, senior credit analyst at Lucror Analytics. The merger is expected to be finalised by the end of March, subject to regulatory approvals.

"The merger with CIL also marks a major step in the simplification of Vedanta's complex organisational structure and, in particular, in addressing some of the risks associated with the group's thinly capitalised but highly leveraged parent company," wrote Moody's.

That should benefit bondholders at the holding company level and ease concerns about the issuer's ability to access cashflows from operating companies to service its debt.

CIL reported cash and cash equivalents of Rs243.4bn (US$3.5bn) in its latest financials in October.

Investors were also comforted that Vedanta has passed the peak of its capital expenditure cycle, while the management has said it wants to reduce debt.

The new issue funded a tender for its old bonds, with remaining proceeds used primarily to repay other debt, meaning that the new issue did not have an impact on overall debt levels. The company offered to pay US$1,081.25 per US$1,000 in principal amount for its 9.5% bonds due 2018 and US$1,025.00 for its 6.0% bonds due 2019.

Bondholders tendered US$371.095m of the 2018s and US$425.228m of the 2019s. The company has agreed to accept all of them for repurchase, leaving US$378.905m of the 2018s and US$774.772m of the 2019s outstanding.

Barclays, Citigroup, JP Morgan and Standard Chartered were joint bookrunners.

The bonds were seen at 100.3 in secondary trading.

Reuters News
January 24, 2017, 10:18:00 PM EDT

Reporting by Daniel Stanton; Editing by Vincent Baby