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Suzlon has little option but to sell REpower

According to reports, Suzlon Energy Ltd may have got a breather from owners of its foreign currency convertible bonds, but its equity shareholders are taking the latest development with large doses of salt. The company’s shares have moved in a narrow band in the past two trading sessions and continue to trade close to an all-time low.The company’s ability to repay its FCCB owners $360 million in June 2012 was expected to be a key trigger for the stock. If Suzlon had been successful in raising funds by selling non-core assets, recovering dues worth $200 million from a large US customer, and by generating the balance through operating cash flow and internal accruals, the stock would have got re-rated. With the company now saying that it is in the market to raise loan funds to repay its FCCB dues, it is evident that the company is getting pushed deeper into a debt vortex.

As things stand, the only reliable solution left for the company is to sell a large stake, if not its entire stake, in wind turbine manufacturer REpower, which it acquired about five years ago. To be sure, Suzlon’s debt problems began with the large REpower acquisition, and it is only fitting that this arm is sold to get out of the current disarray. But it must also be noted here REpower is currently the company’s only division that is performing reasonably well. Execution in the domestic wind power business has been poor. And recent regulatory changes are making things worse for Suzlon’s wind power business in India. It’s hardly suspiring, then, that Suzlon’s management isn’t eager to sell REpower.

But what’s interesting is that reports indicate banks are still willing to lend money to the company to repay FCCB owners, albeit at a high price. An analyst with a foreign brokerage deems it strange that senior debt holders are willing to finance a company to repay junior debt. Perhaps bank lenders don’t want the company to get into trouble and find themselves stuck with large non-performing loans. But extending further loans is clearly not a solution.

Perhaps Suzlon investors and lenders are banking on somehow seeing operations turning around and cash flow picking up. At present, though, there are few indications of those hopes being realised. It’s time all stakeholders got more pragmatic about the situation at hand. Meanwhile, the record low valuation of the company’s shares show that equity owners are currently the most sensible of the lot.

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