India Wind-Farm Debt Crisis Lures Buyers Waving Cash

Ushdev Power Holdings Pvt. plans to boost wind-power generation capacity in India sevenfold by acquiring farms from indebted companies selling assets built for tax breaks.

Closely-held Ushdev Power bought 60 megawatts of projects from Suzlon Energy Ltd. at less than half the cost of building new wind farms a year ago as the turbine-maker struggled to raise cash to pay bondholders. That was the first of 400 megawatts of acquisitions Ushdev plans over the next 15 months, which would make it India’s second-biggest owner of wind assets based on current holdings, according to data compiled by Bloomberg.

“Our strength is that we can sit across the table and say, ‘I’m here, I have the money, I will close the deal today,’” Arvind Prasad, managing director of Ushdev Power, said in an interview in Mumbai. “These sellers require the cash now.”

India’s fragmented wind industry is ripe for mergers and acquisitions. Goldman Sachs Group Inc. and Morgan Stanley have led about $1.1 billion of private-equity buyouts, project and company acquisitions in the industry since 2010, said Ashish Sethia, Bloomberg New Energy Finance’s India country manager. Property developer DLF Ltd. and truck maker Ashok Leyland Ltd. are among those selling their wind portfolios.

Ushdev Power, based in Mumbai, paid 1.7 billion rupees ($29 million) to Suzlon, including 680 million rupees for the assets and 1 billion rupees in assumed debt. That comes to about 28 million rupees a megawatt, compared with about 65 million rupees for a new farm, Prasad said. Suzlon said in an e-mail yesterday it may earn an additional 250 million rupees in fees from the deal.

‘Generate Cash’

“The primary drive toward selling wind assets has been to generate cash and exit from non-core areas,” said Sanjay Chakrabarti, a Mumbai-based Ernst & Young LLP partner advising funds considering acquisitions to enter the Indian wind market. “In several cases the position has been aggravated due to the owner of the wind turbines being cash strapped.”

India became the world’s third-biggest wind turbine market in 2010, after China and the U.S., partly as a federal incentive spurred companies without experience to invest in thousands of farms to gain tax depreciation benefits. DLF, India’s biggest and most-indebted property company, agreed to sell 217 megawatts of projects for 5.23 billion rupees since January after running up debt to fund expansion into wind farms, hotels and export-processing zones.

Ashok Leyland, the nation’s second-biggest truck maker, and infrastructure developer Lanco Infratech Ltd. have said they’re seeking to sell assets. KS Oils Ltd., a canola oil processor restructuring its debt, also put 92 turbines up for sale, according to an advertisement published last year by SBI Capital Markets, its main lender. KS Oils Chairman Ramesh Garg didn’t respond to a call and text message to his mobile phone and the company didn’t respond to an e-mail requesting comment.

Less Risk

Wind utilities, such as Goldman Sachs-backed ReNew Wind Power Pvt., Morgan Stanley-backed Continuum Wind Energy Pte and IDFC Ltd.’s Green Infra Ltd. unit are seeking to amass gigawatt-scale portfolios to reduce generation costs, in some cases to lower than those for new coal-based power projects. Green Infra is looking to buy operating farms because “there are excellent opportunities in the market for companies with the capital,” said Raja Parthasarathy, a partner at IDFC Alternatives.

“The risks of an operating asset are much, much less as compared to a new project,” Prasad said. “Performance of the project is already established.” At the right structure and price, returns are as much as 18 percent to 20 percent, he said.

Minimum Conditions

Ushdev looks exclusively at farms three to four years old, with a minimum capacity of 20 megawatts, which typically cost 35 million to 40 million rupees per megawatt, he said.

Even then, credibility of data recorded by current projects and the challenge of managing scattered assets presents risks.

“The purchase of operational assets is attractive,” said BNEF’s Sethia. “Nevertheless, differences on expected valuations, poor data quality and documentation, and questionable credibility of the seller could prove stumbling blocks in a transaction.”

Of the deals Ernst & Young has worked on, projects have had limited potential to boost profit through technical improvement, Chakrabarti said. The “deal sweetener” is when a new buyer can be arranged who will pay more for the power generated, he said.

Ushdev Power agreed to pay Suzlon 250 million rupees more in fees if the turbine maker managed to cancel the farms’ power purchase agreements with cash-strapped state buyers, Prasad said. That would allow Ushdev to sell electricity direct to industrial companies that pay on time and at higher rates.

That part of the contract “is currently in process,’ Suzlon said in an e-mail response to questions. The company is trying to raise $400 million in asset sales after India’s biggest convertible-bond default in October. The Pune-based turbine maker declined to identify whether it has more wind farms for sale.

Ushdev Power plans to sell shares in an initial public offering once it has a portfolio of about 500 megawatts by the end of 2014, Prasad said. It may seek to buy 28 megawatts from Ushdev International Ltd., which plans to spin off its wind unit. Both companies belong to the Mumbai-based Ushdev Group and have no cross holdings, he said.