Vedanta Resources' offer to buy out the Indian Government's stake in Hindustan Zinc (HZL) and Balco will be credit positive for the company, said Moody's on Monday.

(However, the rating agency said its current outlook for Vedanta remains negative because of mounting pressures on the minerals sector, from which it draws most of its revenue.)

If accepted by the Government, Vedanta's Rs 15,000-crore offer price for HZL, which has Rs 16,000 crore of liquid funds on its balance sheet, would be a windfall for Vedanta, said Moody's.

Vedanta already owns 64 per cent of HZL, but the Government's minority stake restricts it from using HZL's cash to support its other group companies.

The company has offered Rs 15,000 crore for the Indian government's 29.5 per cent stake in HZL and Rs 2,000 crore for the state's 49 per cent interest in Balco.

Moody's expected that the Government would, before the sale, seek a higher price in order to avoid the deal appearing to be self-funded (since the HZL has surplus funds). The government could also seek a special dividend to extract its 29.5 per cent share of the surplus funds, it said.

Financing the buyout of the Government's stakes in HZL and Balco could prove problematic for Vedanta, as the group's consolidated cash position is largely the cash held in HZL. The company will therefore still need bridge financing, which it can repay once it has control of HZL's cash, Moody's added.

But the group is currently restructuring, which involves moving $5.9 billion of existing debt from the UK parent to a new merged entity in India that holds the present stake in HZL. Therefore, the paying of a special dividend by HZL would also help Vedanta's funding conundrum, albeit at the cost of paying withholding tax to government.

While the purchase of the minority interests in HZL and Balco might not result in significant debt increase, given the cash assumed, the group's net indebtedness will rise by the price paid, it said.

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