Suzlon trims debt costs by issuing second CB

The fast-growing wind turbine company attracts strong demand thanks to a relatively low conversion premium and stabilising credit markets.
IndiaÆs Suzlon Energy, the worldÆs fifth largest manufacturer of wind turbine generators, was back in the market Friday raising $200 million from its second convertible bond issue in four months and, like last time, investors piled in for a chance to be part of this fast-growing company.

Having recently completed the Ç1.3 billion ($1.8 billion) acquisition of its German rival, REpower Systems, Suzlon is seen to be in a prime position to accelerate its growth in Europe, both within the onshore and offshore technology markets. The company says it will be able to increase volumes at REpower, while reducing input costs and improving margins. It is currently undergoing an aggressive expansion program that will increase its combined manufacturing capacity to 4,200MW of capacity by January 2008 from 2,700MW today.

In the fiscal first quarter to June 30, the company reported a 62% increase in sales volumes and 82% growth in total consolidated revenues to Rs19.45 billion ($488 million) over the corresponding quarter last year, despite the fact that supply-chain bottlenecks posed a major challenge for the industry. Net profit fell to Rs20 million from Rs96 million partly due to the REpower acquisition.

Demand was also helped by the fact that the previous CB has traded well, partly because of rising share prices, partly because the size available to investors was limited to $100 million which caused a bit of a squeeze when the bonds started to trade up. Being faced with a credit that was trading all over the place since the drawn-out bidding for REpower was still ongoing at the time, the first CB was arranged on a private basis by Deutsche Bank who agreed to buy $200 million worth of bonds for its own books. The bank then offered an additional $100 million worth of bonds to the market at the same terms, increasing the total deal size to $300 million.

The new five-year CB was modelled on the previous one and brought to the market with fixed terms. However, the 59.6% conversion premium that was used last time has been almost halved to 30%, which makes it look much more attractive. Especially since the yield to maturity is almost identical at 7.55% compared with 7.6% on the May issue.

One source noted that it was the yield that was the most important to the company and the management also realised that a 60% premium wouldnÆt get done in the current market environment.

Even with the lower premium, the absolute conversion price will still be higher than the Rs1,800 per share that it achieved on the previous bonds, however, thanks to the 30% increase in the share price since then. The price fell from a record closing high of Rs1,531.60 on July 23 as global equity markets tumbled, but has recovered most of those losses over the past couple of weeks.

The new bonds will convert at Rs1,859.40, which equals a 30% premium over the volume-weighted average share price on the National Stock Exchange of India in the five days ending September 20. Since the bonds rose slightly during this period, the premium versus the latest closing price of Rs1,467.70 is an even lower 26.7%. The share price fell 2.4% on Friday when the deal was taking place.

Contrary to the CB issued in May, the new bonds have no conversion premium reset, which is positive for the company. The previous bonds carry a reset down to 40% over the market price after one year. Like last time, the new bonds also have a mandatory conversion feature after two years, although the hurdle has been raised to 130% from 120%.

Suzlon will pay no coupon on the bonds, which will help reduce its overall financing costs. The money raised from the CB will be used to repay short-term debt taken up during the acquisition of REpower as part of the companyÆs efforts to replace bank loans with non-interest bearing debt. In August the company reduced the size of a proposed multi-tranche syndicated loan to Ç1.08 billion from Ç1.3 billion through an early repayment. The loan, which involves a total of 24 banks, was signed on September 7.

The latest CB was a bought deal arranged by Credit Suisse, and marks a important mandate for the bank which is in the process of re-building its Indian franchise after being forced to wind up its operations here in 2001. So far, the bank has been involved in only one other equity deal when it acted as one of six bookrunners for HDFC BankÆs $607 million follow-on ADR issue in July.

Market sources say Suzlon initially wanted to do this deal in early August and even asked for proposals from a few banks, but wasnÆt able to get the terms it wanted. One reason for that was that SuzlonÆs high debt burden made banks reluctant to provide a credit bid. And given the volatility in the market, investors were generally asking for 100% protection at that time.

The stabilisation of credit markets in recent weeks and the rate cut by the Federal Reserve last Tuesday have resulted in a more positive backdrop, however. A pickup in secondary market trading of the outstanding CB over the past week also suggested there would be demand for more bonds.

And it appears that was indeed the case. According to a source, the Suzlon CB ended up more than six times covered, even though the books were only open for an hour and a bit. Some of the demand may, however, have been caused by inflated orders after the bonds were bid up to 101% of face value in the grey market, the source says.

More than 100 investors came into the deal, including both the usual high-quality CB investors and proprietary traders who wanted part of the action once it became clear the deal was going well. The five-year bonds were launched at about 4.30pm Hong Kong time while the Suzlon stock was still trading.

Somewhat surprisingly, given the jittery credit markets, investors appear to have been happy to take on board this issue without any credit protection as the bookrunner didnÆt offer any asset swaps. That suggests most of the buyers were looking at the issue for the equity story. Apparently there were a small amount of credit default swaps offered at 350bp over Libor, but most investors were said to have assumed a credit spread of 375bp.

This is in line with the 350bp-400bp spread used for the first bond issue in May.

At that level, and based on assumptions of a 0.35% dividend yield and a 5% stock borrow cost, the bond floor ended up at about 93.7%. The implied volatility was about 27%-28%, although investors werenÆt too concerned with that since you cannot really short the stock. However, there is a very limited amount of synthetic borrow available, which may have given some additional support to the issue.

The is only the third Asian CB since the equity markets started to recover after the August correction and the largest so far. Credit Suisse helped re-open the market on September 3 with a $150 million convertible for Indonesian coal miner Bumi Resources. According to sources, that bond was the result of a reverse inquiry from an investor and had identical terms to a CB the bank did for Bumi in June. It was followed by a $140 million deal for Thailand-based dry-bulk shipping firm Thoresen Thai Agencies last week that was arranged by Merrill Lynch and Macquarie Securities.

The latest CB by an Indian issuer came in early August when Tata Steel raised $875 million from a highly structured deal arranged by ABN AMRO, Citi and Standard Chartered.
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