Suzlon Bonds Rally Most in Two Years on Redemption

Suzlon Energy Ltd. (SUEL) handed its convertible bondholders the biggest monthly gain in more than two years after India’s largest wind-turbine maker redeemed $360 million of debt and averted default.

The company’s $175 million zero-coupon note due July 2014 rallied 8 percent in July, the most since December 2009, pushing yields down to 29.1 percent from 32.7 percent, prices from Elara Capital Plc. show. Its debt due October 2012 gained 2.3 percent. India’s equity-linked notes rose 1 percent last month, underperforming the 2 percent return on South Korean and Hong Kong bonds, Barclays Plc indexes show. Comparable U.S. securities returned 0.8 percent.

Suzlon shares have jumped 8.8 percent since July 27, when the Pune-based company repaid bondholders with the proceeds from bank loans and asset sales amid intense competition and an industry supply glut. The redemption came on the last day of the 45-day grace period it had sought to avoid default after sales slowed due to the debt crisis in Europe. Sun Global Investments Ltd. and Acropole Asset Management are among holders of the turbine maker’s debt.

“There is reason to be a bit optimistic on Suzlon after the spate of bad news,” Raj Kothari, a convertible bond trader at Sun Global in London, said in a July 30 telephone interview. “Confidence is restored to some extent.”

Suzlon redeemed the convertible bonds after borrowing $300 million from 11 lenders including State Bank of India and ICICI Bank Ltd., according to a person familiar with the matter.

Asset Sales

Chief Financial Officer Kirti Vagadia had said on June 25 the turbine maker expects to raise $60 million by selling a factory in China and, on July 26, Suzlon announced the completion of a sale of wind-farm assets in India for $40 million.

Suzlon posted three straight years of losses and is seeking to reduce debt and increase orders. The wind-power equipment maker reported a fourth-quarter loss of 3 billion rupees ($54.1 million) on May 25 as sales declined and finance costs increased. The company is due to report first-quarter earnings this month.

Repower Systems SE, its German unit, on July 31 reported winning cumulative orders of 219 megawatts from Australia, France, Germany, Italy and Poland over the last two months. Suzlon gets more than 50 percent of its orders from Europe.

The company bought a 7.7 percent stake in Repower in 2007 and gradually expanded its holding over four years. In October 2011, it bought out minority shareholders’ remaining 4.8 percent stake. In January this year, Suzlon acquired 49 percent of PowerBlades GmbH it didn’t already own for an undisclosed sum.

Funding Acquisitions

“Suzlon has been aggressively raising money to make foreign acquisitions in a risky industry,” said Xavier Linsenmaier, a convertible bond manager at Acropole in Paris, which manages 750 million euros ($922 million) including the Indian turbine maker’s 2016 bonds. “Suzlon has the right products. I hope they can deliver to make everyone happy.”

The company has $922 million in revolving facilities, according to data compiled by Bloomberg. It also has $406 million of convertible bonds outstanding, including two issues amounting to $142.2 million coming due in October 2012.

“We are working with multiple levers, including internal accruals, sale of non-critical assets, bank loans and capital market options to address future obligations,” Suzlon said in an e-mailed statement today.

Rupee Risk

Suzlon faces the risk of higher costs as a weakening rupee and slowing economic growth discourage overseas investors from buying Indian assets, said D.K. Aggarwal, who oversees almost $300 million as chairman of SMC Investments and Advisors Ltd.

The local currency’s 4.9 percent drop this year has made it the worst performer among the 11 most-traded currencies in Asia.

“The rupee is still vulnerable to external and domestic shocks,” New Delhi-based Aggarwal said in a July 31 interview. “That may spell a bit of a problem for convertible bonds, including Suzlon’s debt. So, there’s no absolute comfort on the repayment aspect.”

The rupee has tumbled almost 21 percent against the dollar in the past 12 months while the benchmark BSE India Sensitive Index (SENSEX) declined 5.1 percent in the same period. The yield on the 8.15 percent government bond due June 2022 rose seven basis points in July to 8.25 percent. It declined two basis points, or 0.02 percentage point, to 8.21 percent as of 1:45 p.m. in Mumbai, according to the central bank’s trading system.

Interest Rates

Reserve Bank of India Governor Duvvuri Subbarao on July 31 left the benchmark repurchase rate unchanged at 8 percent for the second straight meeting, citing price pressures.

He raised the central bank’s inflation forecast to 7 percent from previous a projection of 6.5 percent, while lowering its economic growth estimate to 6.5 percent for the year ending March 2013 from an earlier prediction of 7.3 percent. Gross domestic product expanded 5.3 percent in the three months ended March 31, the least since 2003.

Suzlon’s zero-coupon bond due Oct. 10 has climbed every month since February, pushing its yield down to 51.7 percent from 70 percent at the beginning of the year, according to prices from Elara Capital. Its 7.5 percent note, which matures on the same day, has also rallied in the past five months, cutting its yield to 58.8 percent from 68.4 percent.

“For those who are comfortable with Suzlon’s credit for the next three months, the next attractive opportunity is the October 2012 bonds,” said Mikhail Filimonov, a New York-based managing partner at Odyssey Investment Management LLC., which manages hedge funds with $150 million of assets and owned bonds that Suzlon redeemed on July 27. “We are pleased the company did whatever it needed to do to service its debt.”

To contact the reporters on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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