Fitch Ratings on Tuesday cut the credit rating of Vedanta Resources citing risks arising out of its entry into a new business with the group’s proposed $9.6 billion deal to acquire oil exploration firm Cairn India.

U.K.-based Vedanta on Monday announced that it would acquire as much as 60 per cent stake in U.K.’s Cairn Energy’s Indian subsidiary Cairn India.

“The downgrades reflect the substantial size of the Cairn India acquisition, in relation to Vedanta’s existing cash flows and debt levels, as well as the added risk of the latter’s lack of track record in the oil and gas sector,” Fitch Ratings said in a statement.

The agency has slashed Vedanta’s long-term issuer default rating (IDR) to ‘BB+’ from ‘BBB-’, indicating higher risk of default. Further, the company has been placed on negative rating watch.

Meanwhile, Standard & Poor’s has placed Vedanta’s long term corporate credit rating ‘BB’ on credit watch with negative implications, in the wake of Cairn deal.

“(The action) reflects our view that the proposed acquisition could significantly increase Vedanta’s debt and weaken its financial risk profile to levels below our expectation for the current rating,” S&P Ratings Services, which is part of S&P, said in a separate statement today.

S&P’s credit analyst Craig Parker said Cairn deal marks Vedanta’s entry into a new business — oil and gas.

“As a consequence, Vedanta would heavily rely on Cairn’s existing management team to ramp up oil and gas production and make a meaningful contribution to Vedanta’s earnings,” Parker added.

Mining major Vedanta would be buying a majority stake of about 51 to 60 per cent in Cairn India for total consideration of as much as $9.6 billion.

The deal is to be financed mainly through debt. Subject to regulatory approvals, Fitch assumes the deal would be completed during financial year 2011.

Fitch has also downgraded the ratings on Vedanta’s $500 million bond, due in January 2014, as well the $750 million bond, due in July 2018. In addition to placing these bonds on negative rating watch, the rating has been cut to ’BB’ from ‘BB+’

This action reflects the company’s fragmented holding structure and the presence of material minority interest at key subsidiaries, the statement noted.

“However, if the deal does not conclude and the transaction is reversed, there could be a positive impact on the ratings, assuming that Vedanta’s earlier business plan and strategy remain unchanged,” it added.

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