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Suzlon survival bets rewarded as bond pact reached

According to reports, investors betting on Suzlon Energy Ltd’s survival are being rewarded almost four times more than buyers of other Indian convertible bonds as Asia’s No.2 wind-turbine maker reorganizes $485 million of debt.

The company’s 5% dollar-denominated equity-linked notes due April 2016 returned 8.2% this year as its price rose to 48 cents on the dollar from 46.63, according to data compiled by Bloomberg. Indian debt that can be exchanged for stock earned 2.24%, a Barclays Plc index shows, while a gauge of emerging-market distressed debt gained 3.85%, according to Bank of America Merrill Lynch.

Suzlon, which has faced the threat of liquidation after causing India’s biggest convertible bond default in 2012, reached an agreement with investors to replace obligations due in the five years through 2016 with notes maturing in 2019-2020, the company said in a statement on 3 May. The settlement restores confidence and may help the Pune-based company generate more cash than it needs for expenditure and dividend payments for the first time since 2011, according to HSBC Holdings Plc.

“There is a euphoria that the company will survive, which you typically get after a difficult debt restructuring,” Jayavardhan Diwan, a Mumbai-based advisor to OIM Capital LLC, said in a phone interview on 5 May. “Still, performance is the key for Suzlon to improve its finances to pre-empt selling in its stocks that could drag the convertible notes lower,” he said.
“While OIM Capital doesn’t hold Suzlon bonds now, it has traded them previously,” according to Diwan.

The debt revamp may push Suzlon toward recovery after four straight years of losses that caused it to cede its position as India’s top wind-turbine maker for the first time in at least a decade. The deal removes the stigma of potential liquidation on the company, which unsettled customers and caused 90% of suppliers to stop extending credit and demand bank guarantees that tied up cash needed to carry out orders, according to Kirti Vagadia, head of finance at Suzlon group that also owns German offshore turbine-maker Senvion SE.

“This is the last piece of my debt restructuring,” Vagadia said in a phone interview on 4 May. “We’re not trying to push our problem away for the short term. We are addressing it for the long term. Pushing debt this large by five years is a big thing. It allows us to take many actions, many options to address our capital structure.”

The new bonds will have a coupon rate that will step up over the five years, and the yield will average out to approximately 5%, Suzlon said in an e-mailed statement on 3 May. Five-year AAA conventional corporate debt pay 9.51% in India, according to data compiled by Bloomberg. Ten- year local government bonds yielded 8.77% on Tuesday, while the rupee traded at 60.0975 per dollar.

“Investors will need more clarity on Suzlon’s plan to shore up its finances before investing more in the company,” according to Schroder Investment Management Ltd, which sold the turbine maker’s debt before the liabilities were reorganized.

“Much more clarity on the overall strategy including units like Senvion would be important for us to even contemplate looking at it again at some point,” Dorian Carrell, Singapore- based fund manager for Asian convertibles within Schroder’s fixed income team for the region, said in an e-mail interview on Tuesday. “Some investors may feel uncomfortable until there’s more clarity because the situation has dragged for some time.”

Suzlon’s repayments of `9,500 crore of loans to Indian banks are set to ramp up from 2019, according to a presentation made to investors in February. That debt was restructured in April 2013 by lenders led by the State Bank of India. The company failed to repay $209 million in October 2012, triggering a clause allowing all outstanding bondholders to demand immediate repayment. Those investors could have filed a winding- up petition to push Suzlon to liquidate.
Since April, the company has made progress in efforts to raise cash, including the sale of a US wind farm and an €850 million loan refinancing by its German unit Senvion.

“The debt swap offers temporary relief,” said Shantanu Jaiswal, a New Delhi-based wind analyst for Bloomberg New Energy Finance. Suzlon must focus on increasing its share in the Indian market and it also needs to boost exports to generate sustainable cash flows to repay creditors, he said.

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