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Suzlon Rebounds as Loans Promise to Avert Default

May 25, 2012

Wind turbines stand at the Suzlon Energy Ltd. wind farm in Satara, India. Photographer: Adeel Halim/Bloomberg

Wind turbines stand at the Suzlon Energy Ltd. wind farm in Satara, India. Photographer: Adeel Halim/Bloomberg

Suzlon Energy Ltd.’s (SUEL) convertible bonds are rebounding from a four-month low after India’s biggest wind-turbine maker obtained loan pledges to avoid default in the coming three weeks.

The $175 million 5 percent debt due April 2016 rallied 5 percent in the past week, driving yields down by 243 basis points to 22.55 percent, Elara Capital Plc prices show. A group of about 20 banks have offered as much as $300 million in loans, the company, which must repay $358 million by June 12, said last week. Indian equity-linked notes were little changed in the past three months, outperforming all but one Asian market as South Korean bonds lost 2.9 percent, Barclays Capital indexes show.

Indian convertible securities are trailing only those from Malaysia after the central bank Governor Duvvuri Subbarao cut borrowing costs in April for the first time since 2009 to support Asia’s third-largest economy. Suzlon’s shares gained 5 percent after it announced the funding plan, which followed its worst loss in five quarters amid an economic slump.

“It looks like they’ve avoided default,” Raj Kothari, a London-based convertible bond trader at Sun Global Investments Ltd., said in an interview on May 22. “There’s been huge interest since the loan plan was announced and some of the funds who were holding Suzlon started doubling positions. That’ll give a lift to the Indian convertible bond market too.”

New credit from lenders including SBI Capital Markets Ltd. and IDBI Bank Ltd., combined with cash reserves, should help Suzlon meet its obligations this year, according to London-based Elara Capital. HSBC Holdings Plc estimated in March that the company may fall short by as much as $592 million on bond and loan repayments of $700 million due by April 2013.

Extension Sought

The Pune, India-based turbine maker has asked for a 45-day extension on next month’s payment deadline to accommodate any delay in raising the loan, and most bondholders have supported the request, Vikas Rathee, head of corporate finance, said in an interview in Mumbai on May 18.

“When we’ve paid these bonds, we’ll be out of the woods,” Rathee said. SBI Capital, a unit of India’s biggest bank, is “extremely confident” of completing the loan transaction in time to ensure Suzlon meets its June repayments, Executive Vice President Supratim Sarkar said in an e-mail on May 19.

“This is certainly great news,” Rosita D’Souza, a credit analyst in Singapore at Elara Capital, said on May 19. “They have some time and breathing room now to explore other options if necessary” to meet obligations later in the year, she said.

‘Won’t be Easy’

Suzlon plans to sell as much as $500 million in high-yield bonds later this year through one of its overseas units to help meet future payments, Chief Financial Officer Kirti Vagadia said last month. The company hasn’t yet hired banks to arrange the offering, according to Rathee.

“Selling new bonds won’t be an easy process,” said Sun Global’s Kothari. Issuing debt through its Hamburg-based Repower Systems SE unit “could raise a lot of restrictions that would prevent Suzlon from getting access to those funds,” he said.

The firm also expects to “monetize non-critical assets,” according to an e-mailed statement on May 18. Repower is Suzlon’s “most critical asset” and not for sale, Vagadia said on April 27. Suzlon declined to comment yesterday as it is due to announce fourth-quarter financial results today.

Former Chief Financial Officer Robin Banerjee resigned in March after Suzlon lost 2.86 billion rupees ($51 million) in the three months ended Dec. 31. The firm faces slower sales due to the debt crisis in Europe, where it gets more than 50 percent of its orders. Denmark’s Vestas Wind Systems A/S, the world’s largest wind-turbine maker, and Spain’s Gamesa Corp Tecnologica SA reported losses this month after turbine prices slid 25 percent from a mid-2009 high.

Borrowing Costs

Suzlon may succeed in capping interest expenses, which touched a record in the final quarter of 2011, after the Reserve Bank of India cut its benchmark repurchase rate last month for the first time since 2009. The company paid 3.58 billion rupees in debt costs in the three months ended Dec. 31, according to data compiled by Bloomberg. The RBI’s repo rate is currently at 8 percent, after last month’s half-percentage-point reduction.

“Interest costs have peaked, but are not expected to come down in a hurry,” said Elara Capital’s D’Souza.

Benchmark five-year borrowing costs for AAA rated companies in India declined 12 basis points, or 0.12 percentage point, this quarter to 9.46 percent, data compiled by Bloomberg show.

Yields on 10-year sovereign debt dropped seven basis points in the period. The extra amount sought to hold the notes instead of U.S. Treasuries has retreated 24 basis points from a decade- high 697 reached in November, according to data compiled by Bloomberg.

‘Better Position’

The yield on the 8.79 percent note due November 2021 rose two basis points to 8.52 percent today, according to the central bank’s trading system. The rupee fell 0.3 percent to 55.84 per dollar. Indian bonds returned 2.9 percent this year in the region’s best performance, indexes compiled by HSBC show.

Bond risk for Indian borrowers fell this year as inflation cooled, allowing Subbarao to ease monetary policy. Annual gains in wholesale prices averaged 7.1 percent in the first four months, compared with 9.5 percent in the whole of 2011, government data show.

The average cost of five-year credit-default swaps insuring against non-payment by eight local issuers fell 73 basis points in 2012 to 388, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a nation or company fail to adhere to its debt agreements.

“Suzlon should be in a much better position to meet its obligations for the year” once the loan transaction is completed, Atul Gharde, a Hong Kong-based credit analyst at SJS Markets Ltd., said in an interview on May 21. “But its fourth- quarter results need to be looked at too” to ensure the company has enough cash and orders, he said.

To contact the reporter on this story: Natalie Obiko Pearson in Mumbai at

To contact the editor responsible for this story: Reed Landberg at; Sandy Hendry at;

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