Suzlon Energy Ltd’s woes have increased after its bondholders rejected its request to extend the time for the redemption of foreign currency convertible bonds (FCCBs) of $221 million (Rs 1,160 crore), due to mature this month. The speculation that Suzlon might default and go for liquidation saw the share price fall 5.1 per cent intra-day before closing down 2.1 per cent at Rs 16.20. While domestic bankers are expected to provide some support lowering chances of a default, experts do not rule out an extended period of subdued financial performance for the company.
Suzlon, as of June 2012, reported total net debt of Rs 13,017 crore. This includes FCCBs of Rs 3,641 crore, a part of which, worth $360 million (about Rs 1,895 crore on Thursday), was redeemed in July. With the help of 45 days extension, earlier bonds were financed through the fresh borrowings, sale of assets and internal accruals. But now, the company is again in the news for the redemption of FCCBs of $221 million due this month. This time, the bondholders have rejected an extension of the timeline.
Experts believe this could theoretically lead to a default and there is a possibility that the bondholders might file for liquidation of the company. Suzlon has been buying time from the bondholders so that it could tap fund sources, including cash from its European subsidiary REpower, sitting on cash of about Rs 1,700 crore, realisation of dues from debtors of Rs 1,000 crore, raising low-cost funds abroad and garnering resources through sale of assets.
| RISING DEBT, WEAK PERFORMANCE | |||
| In Rs crore | FY11 | FY12 | Q1’ FY13 |
| Revenue | 17,879 | 21,082 | 4,747 |
| Operating profit | 1,047 | 1,821 | -257 |
| Profit before interest | 390 | 1,160 | -435 |
| Interest | 1,375 | 1,655 | 494 |
| Net profit | -1,324 | -479 | -849 |
| Net debt | 9,142 | 11,129 | 13,017 |
| Source: Company | |||
While the company is still negotiating with the bondholders, given its current situation, there is little possibility that funds could be arranged from internal sources. With market sentiments subdued, raising funds through the equity route will be difficult. Hence, the best possible way could be fresh borrowing, say experts.
Here, Suzlon’s domestic lenders like State Bank of India are reportedly willing to look for ways to restructure its debt to help meet its obligations. Domestic banks have large exposure to the company. Experts believe some settlement will work out because liquidation is not in anybody’s interest and could take even more time than the company is asking from its bondholders.
“In a most likely scenario, the company will have to borrow more funds, which the domestic banks could help in to some extent, and will be able to pay to the bondholders,” says S P Tulsian, an investment expert. In that case, the debt might not go up because old loans will be swapped for new ones, but interest cost will go up if the fresh borrowing is rupee-based.
This would provide some time to Suzlon, and once liquidity improves (through realisation of debtors, cash from REpower and asset sales), it could pay back banks’ debt. Nevertheless, while this could help avoid the crisis, Suzlon’s financial condition is set to remain critical as a result of higher interest costs and weak business environment.
Analysts believe the journey is going to be tough. They expect weakness in demand to continue in some of its key markets like the US and Europe, impacting volumes and revenues. Suzlon had earlier targeted to achieve consolidated revenue of Rs 27,000-28,000 crore, which analysts believe will be difficult. This translates into volumes of about 4,500 Mw (assuming realisation of Rs 6.2 crore a Mw) or 36 per cent growth compared to last year, which is not going to be easy.
And, given the estimated net interest cost of Rs 1,500-1,550 crore (at 11.5-12 per cent of debt) this year on a profit before interest of Rs 1,480 crore leading to losses, it is likely that FY13 could be the third consecutive year that Suzlon will report losses. Clearly, it’s imperative that Suzlon takes serious steps to cut debt. Otherwise, even if it manages to postpone the issue for now, the debt ghost will come back to haunt.
