Vedanta Resources is coming under pressure on concerns about its debt levels.
In a climate where investors are increasingly worried about company finances and possible breaches of banking covenants, Deutsche Bank has opened up a debate around Vedanta.
The bank's analyst Grant Sporre has cut his target price from £21 to £16.70 but kept his buy recommendation. However his analysis of the company's debt has brought the issue to the attention of the market, and Vedanta's shares have dropped 43p to 912p. He said:
We believe the key question for investors is whether Vedanta will breach covenants and whether the subsidiaries can service the parent level debt. In our view this depends increasingly on a robust oil price, as Cairn India [which Vedanta is buying] will need to provide the majority of dividends to service parent level interest payments. We estimate commodity prices will need to fall by another 15% and stay at these levels for 2013 before Vedanta is likely to breach covenants. Much of this risk is priced in already in our view.
He gives more detail on the effect on Vedanta's finances of falls in the price of oil and other commodities:
Given the recent sharp fall in commodity prices, we have conducted a stress-test to ascertain at which commodity prices Vedanta will breach its 2.75 times net debt to EBITDA covenant condition in 2013. These are: Oil (Brent) at $85 a barrel (25% below spot), iron ore fines $100 a tonne (22% below spot), copper at 280cents a pound (15% below spot), zinc at 80 cents a pound (10% below spot) and aluminium at 95 cents a pound (2% above spot). Under this scenario, we estimate that Vedanta's net debt will rise over the next two years to more than $12bn, and the net shortfall in attributable interest payments is likely to be around $260m per annum.
