Suzlon Convertibles Slump as Rescue Threatened: India Credit

The convertible bonds of Suzlon Energy Ltd., the Indian wind-turbine maker that defaulted last year, are falling from a five-month high as a cash squeeze threatens its efforts to reorganize debt.

The company’s 5 percent equity-linked dollar securities due April 2016 slid 8.3 percent from a Feb. 6 peak to 50 cents on the dollar, prices from Jefferies Group Inc. show. Offshore Asian fixed-income notes that can be exchanged for shares lost 0.3 percent in the past month, according to a Nomura Holdings Inc. index. Suzlon’s bonds rallied 17 percent in January as its Indian lenders approved a two-year moratorium on payments on local borrowings.

India’s largest wind-turbine maker needs money to repay foreign creditors and boost equity capital under the liability-restructuring agreement with lenders. Suzlon’s founders sold part of their holdings last month and the firm plans to sell “non-critical” assets including China unit Suzlon Energy (Tianjin) Ltd. to raise money after international bondholders rejected a request for an extension on payments.

“I feel there’s more pain left in Suzlon,” Raj Kothari, a fixed-income trader at Sun Global Investment Ltd. in London, said in an e-mailed response to questions on March 5. “Founders may have to sell more shares to save the debt-restructuring plan. Suzlon should come up with a precise roadmap on repayments.”

Suzlon’s 2016 notes tumbled to an all-time low of 35 cents in October, when it failed to repay $209 million in India’s biggest convertible-bond default. The company reported an unprecedented loss of 11.56 billion rupees ($211 million) for the last quarter of 2012 as dwindling working capital reduced its ability to complete orders.

Selling Shares

The company’s shares plunged 34 percent, the most in four years, in Mumbai on Feb. 28 as its founders sold 109.9 million shares as part of the debt-recast plan. There’s no need to sell more shares for cash, Chief Financial Officer Kirti Vagadia said in a phone interview on the same day. The stock slide reflected investor concern Suzlon’s main stakeholders are resorting to distressed-asset sales, according to Destimoney Securities Pvt.

“Founders selling their stake to raise funds for repaying debt shows their desperation,” Sudip Bandyopadhyay, chief executive officer at Mumbai-based Destimoney, said Feb. 28.

A consortium of 19 lenders led by State Bank of India approved the proposal to cut interest rates on loans and extend repayments over eight years after the two-year moratorium with effect from Oct. 1, Pune-based Suzlon said in an exchange statement on Jan. 24.

‘Fast-Track Basis’

“The corporate debt restructuring plan is going well,” CFO Vagadia said in the Feb. 28 interview. Founders “need to complete the CDR on a fast-track basis. In the coming financial year, we will spend a lot of time on asset sales, rebuilding our business and on reducing working capital intensity by tightening our inventory cycle,” he said.

Stagnant demand for turbines amid a global economic slump is clouding Suzlon’s business outlook.

Installations may stall in 2013 as policy uncertainty and financing difficulties weigh on projects, Suzlon Chairman Tulsi Tanti said in an interview on Jan. 28. He expects about 45 gigawatts of additions worldwide this year, little changed from the 44.8 gigawatts of turbines Bloomberg New Energy Finance estimates were built in 2012. The London-based analyst forecasts the market to decline to 39.3 gigawatts this year.

Annual increases in India’s wind power generation capacity slowed to 2,540 megawatts in 2012 from 2,827 megawatts in 2011, according to Bloomberg New Energy Finance, which estimates gains this year between 2,300 megawatts and 2,500 megawatts.

More Pessimism

“There is nothing to look forward to except pessimism and for Suzlon, it would be like climbing a mountain to get back investor confidence,” said Hemant Dharnidharka, head of credit research at SJS Markets Ltd. in Bangalore.

Suzlon’s interest expenses averaged 4.56 billion rupees in the first three quarters of the financial year ending March 31, compared with 3.34 billion rupees a year earlier, according to data compiled by Bloomberg.

Interest rates in India remain the highest among Asia’s biggest economies even after the Reserve Bank of India reduced its benchmark repurchase rate by 75 basis points, or 0.75 percentage point, in the past year to 7.75 percent.

Rupee-denominated five-year corporate debt rated AAA by Crisil Ltd., the local unit of Standard & Poor’s, yield 8.93 percent, according to data compiled by Bloomberg. Similar notes offer 4.75 percent in China. Ten-year sovereign bonds in India pay 7.86 percent, compared with 3.57 percent in China.

Rupee Yields

The yield on the 8.15 percent government debt due June 2022 was steady in Mumbai today, offering an extra 593 basis points over Treasuries. Indian sovereign notes returned 2.5 percent this year, trailing the 7.1 percent earned by Philippine securities in the best performance among Asia’s 10 biggest markets, according to HSBC Holdings Plc indexes. The rupee strengthened 0.1 percent to 54.65 per dollar today.

The Indian government’s plan to provide “low-cost” funding and other financial incentives to renewable energy projects may help arrest the slowdown in the sector, according to Bloomberg New Energy Finance. The finance ministry will provide the funds to the state-owned Indian Renewable Energy Development Agency Ltd. for lending to such plants, according to the annual budget unveiled on Feb. 28.

Power Finance Corp., a state-owned lender to electricity projects, cut lending rates for alternative energy projects by 50 basis points last month, after the RBI cut its repo rate on Jan. 29 for the first time in nine months.

‘Additional Incentives’

“The additional incentives are expected to help increase installations from previous estimates,” Shantanu Jaiswal, an analyst at Bloomberg New Energy Finance in New Delhi, said in an interview yesterday. “The overall downtrend in interest rates should also provide some support to the Indian renewable energy sector as better returns for investors can be expected.”

Suzlon may have to look at selling Repower Systems SE, its Hamburg-based unit, to reduce its debt, according to Antoine Bourgault, London-based head of research at ISM Capital LLP.

“Suzlon’s Indian operations remain crippled by the lack of working capital, which is causing clients to cancel existing orders,” Bourgault said in an e-mailed response to questions on March 5. “Until the group starts realizing significant asset disposals and reducing leverage, investors are likely to remain on the sidelines. Despite management’s reticence, we believe Suzlon will have to consider the sale of Repower at some stage.”