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Suzlon's debt recast: Tilting at the turbines?

'The firm needs to club debt recast with asset sale if it wants to really improve its finances'

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takes its name from the Gujarati word “”, which means clever thinking, and loans from banks , or 'lon'. Both these ingredients, says its founder , form the cornerstone of any successful business. But it is the latter part of the name that Suzlon has come to be known for in recent times. Even a slew of good news from the maker of wind turbines — a number of big-ticket domestic and international orders — has not been able to mask the infamy from an underlying Rs 13,000-crore loan on its balance sheet.

The company, whose business has suffered in recent times owing to the global economic slowdown, removal of certain tax breaks for wind power producers in India and onslaught of cheap products from China, recently got a breather. In October, it was referred for corporate debt restructuring () after it defaulted on payments of foreign currency convertible bonds () worth $221 million. The lenders restructured its loans to the tune of Rs 9,500 crore, giving it a two-year holiday from interest payment, and enhanced working capital facilities. But will these steps be enough to add new wind to its sail?

Starting afresh
Suzlon’s chief financial officer, , says restructuring was the first step towards “normalising” its business. The firm is hopeful debt restructuring will pay off. Under the plan, Rs 1,500 crore in interest, will be converted into equity or an equity-linked investment, interest rates will be lowered– from an average of 14 per cent to 11 per cent — saving the company Rs 285 crore annually on interest costs, and promoters will infuse Rs 250 crore by way of stake sale (of which Rs 60 crore has already been infused). All this put together will significantly ease Suzlon’s cash flow and financials. Its promoters had sold off around 2 per cent of their equity stake to raise Rs 63 crore, thereby bringing down their holdings to 50.65 per cent.



Suzlon’s debt was re-financed earlier too, in late 2009. But bankers say the recent debt restructuring has more favourable terms. “At that time it was just a re-financing where interest rates were not changed. But this time, it is real restructuring with interest reductions,” says a public sector bank official.

However, not everyone is convinced that Suzlon is out of the woods. Many believe debt restructuring alone might not be enough to rid the company of its loans as it needs to generate more cash to fuel future growth. The odds are certainly not in favour of Suzlon. “In the last ten years, very few companies which went to CDR have come out of it,” says Daljeet S Kohli, head of research, IndiaNivesh Securities. The company’s efforts will have to be paired up with asset restructuring. “The debt restructuring will give Suzlon the much-needed breathing space, but just restructuring will not help. It’s all about and its contribution to the whole equation. That will be the real trump card,” says Jagannadham Thunuguntla, strategist and head of research at SMC Global Securities. Ambareesh Baliga, an independent market analyst, believes that there should be some sort of asset restructuring as well. “Along with debt restructuring, we will also have to see some asset restructuring like a partial sale of REpower. If that is taken care of, then we do not see any roadblock and the company should do well as order flow has been steady,” he says.

To be sure, Suzlon’s debt problems began with the large REpower acquisition five years ago. It had made a $1.3 billion bid for a majority stake in the company. Analysts, therefore, are hoping the company will go the Hansen way with REpower too. Suzlon had bought the Belgian gearbox maker, Hansen Transmissions, in 2006, but sold off its 26 per cent stake in 2011 to reduce its debt burden.

But that is unlikely to happen. REpower is integral to the company's global strategy. “As a group, Suzlon and REpower offer the most comprehensive product portfolio, an unparalleled global reach, and end-to-end execution capabilities,” the company says.

REpower is Suzlon's ‘crown jewel’. It has made Suzlon the world’s fifth largest wind turbine maker. Naturally, the company zealously guards it from any talks of sale. Suzlon bought Repower in 2007, and soon raised its stake to 100 per cent by buying out Portuguese firm Martifer’s stake. It also bought out other minority shareholders via ‘squeeze out’, a tough German regulation.

“The success of this acquisition is seen not only in our position as the world’s fifth largest wind energy company, but also in REpower’s rapid growth since the acquisition with revenues increasing by approximately five times, and profitability by nearly ten times,” the company says in response to a questionnaire.

Prized possession
REpower currently contributes a lion’s share to Suzlon’s revenues. While the standalone revenues of the company stood at around Rs 659 crore in the last quarter,its consolidated revenues was around Rs 5,758 crore.

With the sale of REpower nearly ruled out, many had believed that cash reserves from REpower would be used to pay off some of Suzlon’s debt, as well as commitments to FCCB holders. The German company had cash reserves of Rs 2,000 crore when it was completely merged with Suzlon group. However, a part of the money is now being used to develop REpower’s own businesses.

“REpower’s cash reserves will be used to drive the company’s growth. Repower is the world's second largest company in the offshore wind space. Looking at the enormous growth opportunity in the offshore sector, the management has taken the view to invest the company’s reserves in maintaining its lead in the industry,” Suzlon says.

There is no dearth of outsiders, who admit that REpower is a marquee asset. “It is a great asset, but what it can do to the parent company is also to be seen,” remarked a senior banker who is a part of the lender's consortium.

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