Vestas 50% Bond Gain Shows Cash Anxiety Subsiding: Nordic Credit

Bond investors are betting Vestas Wind Systems A/S’s strategy to generate more cash is working.

Since the 4.625 percent 600 million-euro ($786 million) bond due 2015 reached a low on May 21, it has returned investors 50.4 percent, including reinvested interest, according to data available on Bloomberg. Denmark’s two-year government note has returned 1.5 percent in the same period, while Vestas shares have gained 23 percent.

“Vestas is progressing with its restructuring and improving on credit metrics,” Kasper From Larsen, an analyst at Danske Bank A/S, who has a buy rating on the bond, said in a phone interview. “They are adjusting their capacity to reflect the demand in the market.”

The bond soared today to its highest since Feb. 8, 2012, after the yield dropped 1.8 percentage points. The performance underscores a turnaround at Vestas as targeted contracts get signed and payments replenish cash flow. The company now looks poised to deliver a similar recovery to German competitor Nordex SE, Larsen said. The Nordex 6.375 percent bond due 2016 yielded 5.1 percent today compared with 16.2 percent on May 14 last year, according to Composite Bloomberg Bond Trader.

Nordex Model

The traded yield on Vestas’s euro bond eased to 10.74 percent as of 1:08 p.m. in Copenhagen, from 18.15 percent on Jan. 2. The yield peaked at 26.1 percent on May 21 last year, according to Composite Bloomberg Bond Trader.

“Nordex has come the farthest in restructuring and seen a nice uptick in customer orders,” Larsen said. “They are about six to nine months ahead of Vestas.”

Vestas, which is vying with General Electric Co. for the lead in the global wind turbine market, has lost money for two years as overcapacity in the industry pushed down prices. Even after this year’s 47 percent gain, Vestas’s shares are down 94 percent since an August 2008 peak.

Vestas lost 963 million euros last year and 166 million euros in 2011 after making a total of 1.65 billion euros in net income in the five years before that, according to stock exchange filings. It is halfway through a two-year push to cut its workforce by about 30 percent to 16,000 and aims to sell factories to reduce costs and align production capacity with market demand.

Bank Accord

The Aarhus, Denmark-based company persuaded a group of nine banks in November to provide loans until January 2015 through a new 900 million-euro credit line. That’s 400 million euros smaller, and due one year earlier, than a previous facility. The maturity can be extended by as much as two years.

Vestas forecast “positive” free cash flow for 2013, without giving a specific number. Though it had a similar target for last year, Vestas ended up posting a negative free cash flow of 359 million euros. It generated 416 million euros of free cash in the fourth quarter last year, allowing it to cut net debt by 387 million euros.

“Worries that they might run out of cash have been dialed down,” Janne Vincent Kjaer, an analyst at Jyske Bank A/S who has a buy rating on the Vestas bond, said in a phone interview. “Everyone will be looking at the free cash flow for the first quarter.” The Vestas bond has reached her 12-month yield target of 11 percent.

Order Intake

Vestas more than doubled its year-to-date order intake on Monday with a 299-megawatt turbine contract signed with a Canadian joint venture of EDF Renewable Energy and Enbridge Inc.

“The order is of a nice size, but more important is the customer,” Larsen said. “EDF is a large utility customer that signed a large order and a 20-year maintenance contract. That’s a large customer that says they see you around for a long time.”

Vestas will generate free cash flow of about 123 million euros this year, according to a Bloomberg survey of 10 analysts. The estimates range from as low as minus 79 million euros to as high as a positive cash flow of 290 million euros.

“The first two quarters of the last financial year were quite nasty, so year-on-year we expect an improvement in cash flow generation,” Larsen said. “I expect a meaningful recovery in orders, but they won’t go back to the strength of 2010 and 2011 this year. In the past they have probably taken too many orders of low profitability.”

In February, Vestas reduced this year’s shipments forecast to an interval of 4 gigawatts to 5 gigawatts of turbines from previous guidance of about 5 gigawatts.

The company’s Bloomberg default risk rating, a measure based on Vestas’s reported earnings, operating performance and market information, fell to 0.124 percent today from 1.9 percent on Dec. 11. That compares with a 0.006 percent default risk rating for Siemens AG and 0.14 percent for Nordex.

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