An iceberg of debt appears to threaten Vedanta Resources

The carrot being dangled for minority investors is of payouts. A Vedanta presentation notes “consistent shareholder returns" from more than $11 billion in dividends over the past decade. That was from one listed firm. Now there will be cash rolling in from half a dozen. Which is why perhaps the initial stock-market reaction to the spin-off had none of the pessimism that the news triggered in the bond market. Vedanta Ltd shares rose nearly 4% on Tuesday, even as Vedanta Resources’ dollar notes slipped deeper into distress territory. Equity investors are betting that the brood will funnel as much cash to the parent as possible. A part will come to them. Bondholders are saying it won’t be enough to make them whole, especially given Vedanta Resources’ large funding gap in the fiscal year starting in April 2024. Both could be right.

Alternatively, Agarwal may be able to sell one or two of the operating companies, or extend the maturities on his debt. Slimming down may be a better route to staying afloat than asking bondholders to be patient. S&P Global Ratings cut its Vedanta Resources assessment to CCC from B- on the increased likelihood of a liability management exercise that “we could consider distressed under our criteria," the agency said Friday. CCC is four rungs away from default, and according to S&P, there is a chance of further rating downside over the next three months.

Even if he isn’t out of options [Vedanta Resources is reported to be looking for a refinancing deal], the metals magnate is in a pinch. Minus a boom in global commodities demand, saving the empire may be a touch-and-go affair. To get the benefit of doubt from markets, Agarwal needs something more than dividends. Investors in Vedanta Ltd can hope for even higher payouts as the metals titan splits into six firms to funnel more cash to its debt-laden parent. The timeline of his troubles holds a clue as to what that may be.

The group’s debt woes intensified earlier this year. That was just when Gautam Adani, a businessman from Gujarat, came under a brutal short-seller attack, followed by intense scrutiny of his conglomerate’s corporate governance practices. Adani has denied all allegations. But more importantly, he has managed to keep his financing channels open, despite depressed equity and bond prices. Adani may have persuaded lenders and investors that if India Inc is a national team, it is its most valuable player. This is where Agarwal’s group seems to be floundering. Forget being an MVP. Is Vedanta even on the team?

For one thing, its aggressive financial engineering has ended up annoying New Delhi. In January, the publicly traded part of Vedanta decided to offload some of its African zinc assets to Hindustan Zinc. That deal was valued at roughly $3 billion in phases over 18 months. Back then, Vedanta Ltd was 70% owned by Vedanta Resources. The money floating up to the parent would have taken care of the latter’s liquidity needs. Except that the Indian government, which still owns about 30% of the privatized zinc miner, got spooked by the raid on its cash. A thwarted Agarwal had no option except to offload a small part of Vedanta Ltd in the market.

The second thing that went wrong was semiconductors. India promised to pick up half the cost of chip-making factories, and then baulked at Vedanta when it looked like it couldn’t deliver on a 28-nanometer fab. In July, Hon Hai Technology Group, also known as Foxconn, pulled the plug on the $19 billion joint venture. The Taiwanese contract manufacturer may yet produce 40-nanometer microprocessors in partnership with STMicroelectronics. That leaves Agarwal, who once boasted of creating “a self-reliant Silicon Valley" in Gujarat, in search of a new partner.

Vedanta can shuffle the financial deck chairs all it wants. But after this year’s misadventures, does Agarwal still have enough political clout to secure a lifeline for his empire? That’s what investors will need to know. And yes, they will want those big dividends, too. ©bloomberg