Suzlon Energy plans the first international bond offering among wind-turbine makers in more than a year, testing investor appetite as the industry struggles with a supply glut and dwindling government support.
India’s biggest maker of the equipment may sell as much as $500 million of debt in the third quarter, Chief Financial Officer Kirti Vagadia said August 14. The yield on Suzlon’s 5 percent convertible note due 2016 touched an all-time high of 32 percent August 30, Elara Capital Plc prices show. Similar-maturity debt of Germany’s Nordex yielded 10 percent compared with 13 percent on 2015 bonds of Denmark’s Vestas Wind Systems.
Suzlon needed a 45-day extension to avert default when redeeming $360 million of convertible notes in July. Three weeks later, the Indian unit of Moody’s Investors Service slashed the company’s short-term debt rating eight levels to its lowest junk grade. The company based in Pune, 150 kilometers (97 miles) southeast of Mumbai, last month posted its second-biggest quarterly loss since at least 2007 as costs rose and turbine prices slumped 23 percent from their peak in 2009.
“It’s tough to go for such an investment as a high-yield investor since you have an industry and cash flows under stress,” Tobias Bettkober, who helps manage $500 million of convertible debt in Zurich at Holinger Asset Managment AG including Suzlon notes maturing in 2016, said in an August 29 interview. “Without the support of an anchor investor, I don’t think they’d be able to place such an issue easily.”
Nordex, Vestas
Suzlon, in an August 31 e-mail, declined to comment on the rating downgrade and said “it would be premature” to comment on its bond-sale plans “due to commercial confidentiality.”
Nordex was the last major turbine maker to issue debt to international investors when it raised 150 million euros ($189 million) in April last year selling 6.375 percent notes due 2016. Vestas, the world’s biggest turbine maker, placed a 4.625 percent 600 million-euro five-year bond in March 2010. China’s Xinjiang Goldwind Science & Technology and Sinovel Wind Group have only sold domestic bonds.
The yield on Nordex’s bond touched a record high of 20 percent on May 7, while Vestas’s notes reached a peak of 23.4 percent on May 21, amid falling margins and competition for shrinking orders.
Suzlon lost money for three consecutive years and has $2.8 billion of bonds and loans, including $939 million in revolving facilities, through 2017. The yield on its 2016 notes has climbed 14.2 percentage points from this year’s low of 17.4 percent on March 14, Elara prices show.
‘Tough conditions’
“Given the tough conditions the wind industry is currently undergoing and subdued market conditions, a successful high- yield issuance may be challenging,” Rosita D’Souza, a Singapore-based credit analyst at Elara said in an August 28 e- mail. Suzlon may not generate free cash flows until the end of the next financial year and “will have continued challenges to repay debt that comes up,” she said.
Elara on August 15 advised investors against buying Suzlon’s 2014 and 2016 bonds, citing difficulties in obtaining orders and expiring incentives for wind power.
Annual installations in China, the world’s largest market for wind-power equipment, may slump for the first time in 2012 and decline annually by at least 4 percent through 2015, according to Bloomberg New Energy Finance forecasts. In the US, the second-biggest market, turbine additions may slump 75 percent in 2013 if the federal government fails to extend tax breaks for wind farms, according to Navigant Consulting’s BTM Consult.
‘Easier said than done’
“There is appetite for high-yield bonds as seen in recent issuances, but with Suzlon’s history and current financial condition, it will be tough,” Atul Gharde, a Hong Kong-based credit analyst at SJS Markets Ltd., said in an August 28 e-mail. “They might have to fall back on the holders of their earlier bonds and coax them into buying the new ones. But that, again, is easier said than done.”
To hold Suzlon’s 2016 bonds, investors are demanding yields more than double that of similar-maturity debt of Vestas and Nordex, and more than six times that for Indian issuers.
The average yield on dollar debt of Indian issuers was 5.2 percent on August 31 and touched 5.08 percent on August 13, the least since August 5, 2011, HSBC Holdings Plc indexes show.
Ten-year rupee borrowing costs for companies rated AAA by Crisil, the Indian unit of Standard & Poor’s, fell one basis point to 9.44 percent on August 30. Yields have climbed from 9.22 percent on February 1, the lowest level in 2012.
Cash squeeze
The yield on the benchmark 10-year sovereign bonds has fallen 33 basis points this year. The yield on the 8.15 percent note due June 2022 rose five basis points to 8.24 percent on August 31, according to the central bank’s trading system. The rupee advanced 0.2 percent to 55.5275.
A lack of working capital constrained Suzlon’s ability to carry out orders, the company said August 13 after reporting an 8.6 billion-rupee ($153 million) loss for the fiscal first quarter ended June 30. A cash squeeze forced the turbine maker to seek a 45-day grace period to pay its convertible bonds that matured in June, which were redeemed on July 27 after Suzlon borrowed $300 million from banks and sold two Indian wind farms.
The delay prompted ICRA, Moody’s local unit, to downgrade Suzlon’s short-term debt rating to “D,” indicating expected default on maturity. The rating doesn’t include the company’s bonds and refers to liabilities of one year or less.
‘Structurally challenged’
Suzlon has $142 million of bonds maturing in October, $90 million in 2014 and $175 million in 2016, according to data compiled by Bloomberg.
State Bank of India, one of the company’s main lenders, may help Suzlon repay its October 2012 bonds if the company fails to raise sufficient funds, ISM Capital LLP said in an August 16 note to clients. A representative of the government-controlled bank joined the turbine maker’s board on behalf of a group of lenders, Suzlon said in an August 13 filing.
Credit-default swaps on State Bank, which some investors consider a proxy for the sovereign, fell 64 basis points in 2012 to 331 in New York, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to debt agreements.
“Suzlon’s business model is structurally challenged,” ISM Capital analysts Antoine Bourgault and Melanie Thornton wrote. “We have less confidence in the company’s ability to repay the 2014 and 2016 bonds.”
