OREANDA-NEWS. February 22, 2011. Vedanta Resources' bond yields and credit default swaps signal the UK miner's plan to buy Cairn Energy's Indian exploration unit may collapse, helping avert a debt downgrade on USD 9.6 billion buyout.

Bondholders oppose the deal and are confident that the purchase will be called off as the companies await approval from the Indian government, according to Aberdeen Asset Management Ltd and Erste Sparinvest KAG. The yield on Vedanta's dollar bonds maturing in January 2014 touched a five-month low last week, according to data compiled by Bloomberg. The cost of insuring the company's debt against default dropped to a nine-month low.

"From bondholders perspective, it would be positive if the deal with Cairn doesn't go through," said Peter Varga, who helps manage about USD 200 million of emerging market corporate debt at Erste Sparinvest, and holds Vedanta bonds. "Their capital expenditure plans will already ensure higher leverage in the coming years."

Vedanta, the largest copper producer in India, agreed to borrow USD 6 billion from a group of eight banks for the acquisition. That will add to its existing USD 7.3 billion of debt, Bloomberg data showed. The financing arrangement prompted Fitch Ratings to cut London-based Vedanta's creditworthiness in August and Standard & Poors said on November 26 that it may follow suit should India approve the acquisition of Cairn India Ltd, the operator of the country's biggest onshore oilfield. Emily Dimmock, a spokeswoman for Vedanta, declined to comment. The Vedanta proposal hit a hurdle when state-owned Oil & Natural Gas Corp, Cairn India's partner in the field in Rajasthan state, said it wants to alter the contract on royalty payments. Oil ministry supports ONGC's demand, while Vedanta and Cairn Energy oppose the change.

Vedanta's 8.75% note due 2014 yielded 5.84% on February 15, the lowest since October 7. The rate was 6.03% on February 18. The cost of insuring the companys debt against default has dropped to 475 basis points, the lowest since May 12, from as high as 670 points reached on August 31, according to data provided by CMA London. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point equals USD 1,000 a year on a contract protecting USD 10 million of debt for five years.

"Bondholders now believe the deal may not go through," said Pierre Faddoul, a credit analyst at Aberdeen Asset Management, which manages about USD 282 billion globally and doesn't own Vedanta debt. The deal would mean taking on large debt and bondholders wouldn't like that.

Cairn Energy spokesman David Nisbet said on February 18 that the company continues to work with India's government to secure approvals to complete the transaction by April 15. Cairn Indias shares have declined 5% to Rs 316.10 in Mumbai since the August 16 announcement. The premium of Vedanta's bid price to Cairn India's current share price widened to 28% from 22%. Vedanta offered Cairn Energy Rs 405 for each share, including a non-compete fee of Rs 50.

Vedanta, which operates copper and zinc mines and smelts aluminum, has no experience in oil and gas exploration. The government has said the technical capability of Cairn India's parent is guaranteed in production-sharing contracts and would have to be examined in any proposal that brings a change of parent.