Suzlon Trauma Ending as Modi Helps Double Turbines: India Credit

Sep 01, 2014 6:24 am ET

Sept. 1 (Bloomberg) -- Suzlon Energy Ltd., the wind turbine maker that caused India’s biggest convertible-bond default, is set to return to profit after completing its debt reorganization program by March, Chairman Tulsi Tanti said.

“We expect to exit corporate debt restructuring by the end of the financial year,” Tanti said in an interview in Mumbai. “We’ve boosted operational efficiency and working capital. The challenge is that lenders must support us and the capital markets must remain stable.”

Investors approved a $547 million convertible bond sale in July that would replace four older notes, while Suzlon’s Hamburg-based unit Senvion SE plans to market about 500 million euros ($658 million) of debt to acquire some of its parent’s assets. The Indian company’s losses narrowed 29 percent last quarter from a year earlier, it reported in July.

The turbine maker sees installations in its home market more than doubling this fiscal year, after Prime Minister Narendra Modi’s government in July restored a wind-farm tax benefit after a two-year hiatus. Suzlon is in talks with Japanese companies about forming a potential joint venture to make offshore wind turbines, said Tanti, and is planning investments in Brazil.

After failing to repay $209 million of convertible debt in 2012, Suzlon has worked with lenders and bondholders to defer repayments and avoid liquidation. The company, which hasn’t made profit since 2009, is now seeking to recapture demand after financial woes slowed its ability to carry out orders.

Regaining Lead

Since first announcing plans to restructure its convertible debt in May, Suzlon has regained its position as India’s top wind-turbine supplier from Wind World (India) Ltd. It installed 403 megawatts of turbines, or 19.6 percent share of the market, in the year ended March 31, data compiled by the Indian Wind Turbine Manufacturers’ Association show.

“We would give a fair chance to Suzlon on their revival,” Raj Kothari, a fixed-income trader in London at Sun Global Investments Ltd., said in a telephone interview. “The scope of businesses for the company and the industry is improving.”

Corporate bond risk in India fell this year amid optimism Prime Minister Modi will push policies to spur economic growth after his landslide election victory in May. The average cost of insuring the debt of eight Indian issuers against non-payment for five years using credit-default swaps slumped 113 basis points to 224, according to data provider CMA.

Borrowing Costs

India’s relatively high interest rates made Suzlon’s debt reorganization more difficult, according to Tanti. The Reserve Bank of India’s benchmark rate is at 8 percent, after three increases in the past year. Ten-year government bond yields are at 8.56 percent, compared with 2.3 percent in the U.S., 0.9 percent in Germany and 4.2 percent in China.

The average yield on five-year AAA corporate notes in India rose 15 basis points this quarter to 9.34 percent. The rupee fell 0.5 percent in the same period to 60.515 a dollar.

“We have two different sets of lenders, European and Indian, but one balance sheet,” Tanti said in the Aug. 17 interview. “Our assets are sitting in Europe, our debt in India where the cost is high. It was difficult to service.”

Suzlon’s projection that its debt restructuring program will be completed by March may be too optimistic, according to Antoine Bourgault, the head of credit research at ISM Capital LLP in London. If Suzlon manages to carry out its plan, that would mostly clear $1.5 billion of the company’s domestic liabilities, he said. It would still need to repay about $1.3 billion in overseas obligations, including the equity-linked notes issued in July.

Conversion Risk

“It’s difficult to see though how the group will deal with that,” Bourgault said in an Aug. 28 e-mail interview. “It’s clearly hoping to see the bonds converted. That’s not a risk investors seem prepared to take at this point.”

In India, conversion of bonds into equity takes more than a month, which exposes investors to the risk of a possible drop in the share price during that period, he said.

Bloomberg New Energy Finance predicts global demand for wind turbines to surge 54 percent in 2014 after a 28 percent slump last year.

“The wind market is in the midst of a strong recovery,” according to an Aug. 6 report by the London-based researcher. “Orders for nearly all manufacturers have increased year over year, and margins have improved. Public markets are rewarding companies for the rosier outlook.”

Industry Turnaround

Vestas Wind Systems A/S, the world’s largest wind-turbine maker, is heading for a first cash dividend payment in more than a decade amid an industry turnaround, according to analysts. Vestas will meet its full-year solvency and profitability targets that are preconditions for a payout, according to all seven analysts following the company who responded to an e- mailed Bloomberg News survey.

Suzlon will invest as much as $50 million in a manufacturing plant in Brazil, its first in Latin America, Tanti said in July. The company has turbine facilities in India, China, Canada, Germany, Portugal and the U.S. The company has supplied turbines to Brazilian companies CPFL Energias Renovaveis SA and Queiroz Galvao SA, and has an installed capacity of 750 megawatts in the country.

“Only 25 percent of our revenue is domestic; how many multi-billion-dollar Indian companies get more than 75 percent of their revenue from outside?” said Tanti. “We operate in 32 countries but are still headquartered in India. It’s a huge challenge. I try to grow my management team as entrepreneurs, make the structure decentralized.”