Suzlon brings India's first CB this year

Suzlon brings India's first CB this year
Suzlon sets out to take full control of Germany's REpower.

Suzlon Energy, India’s biggest maker of wind turbine generators and the third-largest wind power equipment maker in the world, on Monday raised $150 million from a five-year convertible bond, which it will use as part payment to squeeze out minority shareholders in its German subsidiary REpower.

The company said in a separate announcement on Monday that it had increased its shareholding in REpower above the 95% threshold that will allow it to initiate squeeze-out proceedings to make the German company a wholly owned subsidiary (it previously held 90.5%). If successful, that will mean it can properly integrate REpower into its other businesses, which until now has been impossible due to Germany’s minority protection laws. Suzlon and REpower both make generators for wind turbines.

Suzlon made no mention of what it is prepared to pay for the minority shares, but based on REpower’s closing share price of €149.75 in Frankfurt on Monday, the 4.84% stake that is not already owned by Suzlon is worth about €67 million ($95 million). However, it might have to pay a premium to the market price. REpower also has a number of outstanding employee stock options that will likely be converted and need to be covered as well. According to a source, the squeeze-out will likely cost Suzlon between $100 million and $120 million.

Suzlon is the first India-listed company to issue a CB this year. Essar Energy sold a $500 million convertible in January, but being a London-listed company, that deal was marketed European-style against a live share price and placed mostly with European investors. The Suzlon deal was pure India, but, on the other hand, it was largely pre-placed with a number of anchor investors and came with fixed terms, and therefore it too didn’t give too much indication of where the market stands at the moment.

However, the deal did offer a decent cash coupon, which is something investors are asking for. In fact, the huge disconnect between investors, who are looking for regular interest payments, and issuers, who still want to issue convertibles with a zero coupon, is a key reason for the drop-off in US dollar CBs from India, according to bankers.

Zero coupons were the norm in India until 2009, but investors have been reluctant to accept that structure since the availability of asset swaps dried up in the wake of the financial crisis, making it difficult to hedge the credits.

Coupon aside, the Suzlon CB was structured to be equity-like, with a conversion premium of only 10% and a mandatory conversion after three years instead of a call (albeit subject to a 130% hurdle), and, according to a source, it was neither marketed nor bought as a model trade.

Indeed, investors bought the CB to get exposure to the company’s equity story and apart from a couple of hedge funds that already held Suzlon shares or bonds, all the buyers were long-only funds.

Suzlon offered the CB with a 5% semi-annual coupon and a 6.5% yield. The 10% conversion premium was set over a reference price of Rs49.10, which was based on the average trading price on Friday and Monday. Compared with Monday’s closing price of Rs49.70 on the National Stock Exchange of India, the premium is slightly lower at 8.9%. Either way, the initial conversion price will be Rs54.01, a level that Suzlon traded at as recently as early January.

However, the share price fell 1.2% to Rs49.10 yesterday in the wake of the new issue. Shortly after opening, the stock was down as much as 3.8% and, in response to that, the CB fell to a low of 98.5. With the recovery in the share price, it traded back up to just above par as the session progressed. However, trading volume wasn’t that heavy with only a small portion of the deal having been offered to the open market.

The CB came with a $50 million upsize option that could increase the total deal size to $200 million. The option wasn’t exercised on Monday, but, according to a source, it may be put to use later, if the CB continues to trade well in the aftermarket.

Suzlon first invested in REpower in 2007 when it bought a 33.85% stake at an enterprise value of €1.3 billion ($1.8 billion at then exchange rates) and took control of 87.1% of the votes through a voting pool arrangement with two other shareholders. Since then it has gradually increased its economic ownership. Under the squeeze-out proceedings, REpower has to appoint a special valuation agent and it will also have to convene a shareholders’ meeting for minority shareholders to approve the offer. Suzlon will announce its offering price before that meeting.

Macquarie acted as global coordinator for the CB as well as joint bookrunner together with Royal Bank of Scotland.

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