Tearsheet DW-APAC 28-Feb-19 Page 1 Pre-restructuring report 28 February 2019 India Suzlon Energy Limited Renewable Energy DEBTOR SUMMARY Promoter Tulsi Tanti and his family Sector Renewable Energy Total debt (9M19) INR 117bn (USD 1.67bn) LTM 9M19 EBITDA INR 4.39bn Leverage (LTM 9M19) 26.6x Source: Debtwire, Company filings ASIA CREDIT RESEARCH Anjali Agarwal India Credit Research Manager - Debtwire Asia [email protected]Dominic Soon Senior Analyst - Debtwire Asia [email protected]Ryan Patwell Head of Research - Debtwire Asia [email protected]LIKELY FCCB TERM OUT ONLY A BAND-AID Suzlon Energy Ltd, a Pune, India-based wind energy equipment manufacturer and service provider, is facing another liquidity crisis (1) ahead of the 16 July maturity of its USD 172m (INR 12.3bn) outstanding out-of-the-money foreign currency convertible bonds (FCCBs). Management is reportedly engaged in a discussion with a leading rival that conceivably could ameliorate liquidity concerns. India’s CNBC-TV reported on 22 February that Danish wind turbine manufacturer Vestas Wind Systems A/S is in discussions to take control of Suzlon, including by buying out promoter Tulsi Tanti (19.8% stake) and investor Dilip Shanghvi (18.6%) and then launching an open offer for the remaining equity. The report maintains that debt reduction would be the main purpose of the deal and as such, lenders will play a crucial role. In our view, a deal that puts Suzlon into the hands of a well-capitalised world market leader in wind turbines will be a game changer. At this stage, it is too early to speculate whether such a transaction is possible, how Vestas could deal with Suzlon’s enormous debt load and what value could be generated from the potential synergies. However, were the Vestas deal to fail to materialize — neither side has commented on it yet — Suzlon’s prospects appear bleak. With deliveries of wind powered turbines expected to sag in the coming quarters and limited other progress on asset monetisation (see page 3 for details), a bond restructuring looks increasingly likely, probably as a term out (explained below). Already in late 2018, management held informal discussions with Hong Kong-based FCCB holders to gauge interest in various methods to deal with the pending maturity, two sources familiar with the matter told Debtwire. Before the Vestas news, other reports indicated that Suzlon was looking at deals to sell off a portion of its business. In December 2018, Economic Times reported that Suzlon was in talks over the sale of a minority stake in its Indian Operations & Maintenance Services (O&M) business in order to pare down debt and repay the FCCBs. The report added that management was also readying a backup plan to raise secured loans against the O&M business in case the sale transaction dragged on. During the 3Q18 earnings call on 8 February, management specifically mentioned that it was in talks with lenders on a debt repayment plan linked to a potential asset-sale targeted for completion by March. Even were Suzlon able to close the sale by then, why would its lenders allow asset sale proceeds to be used first to repay subordinated offshore debt? That would be especially glaring given that the lenders agreed to a long term-out as part of a corporate debt restructuring process (CDR) initiated in January 2013 and the O&M business is clearly Suzlon’s best cash-generating asset. As such, Suzlon’s next move — if a deal with Vestas or for the sale of the O&M business is not reached in time — might need to be to work with bondholders on a potential term out. But that would only provide a short-term solution. The fact remains that Suzlon’s debt burden remains too high even if deliveries for wind turbines were to return to the levels last experienced in FY17 (2) , before the wind turbine market was blown over by a change in India’s renewable energy tariff regime. The pressure is clearly on. Earlier this month, Suzlon was forced to issue a statement denying rumors that it had defaulted on debt. But the statement specified only that the company was regular in servicing debt for “January” without mentioning other periods. Regardless of whether the company is current on its obligations, there is significant risk that it will not be able to service debt in the near future because the capital structure is simply unsustainable. A debt maturity profile provided by the company (see page 7) shows INR 8bn debt coming due in the next 15 months against only INR 1.2bn cash as of end September 2018 (3) . Cash from operations is likely to be significantly negative considering that interest expense significantly exceeds EBITDA. Over the longer term, bank lenders should be prepared to take haircuts either through a formal bankruptcy process or out-of-court to create a smaller, nimbler Suzlon able to compete despite — as Debtwire expects — a steadily declining market share from new auction orders (see page 7). Continued on page 2 (1) Suzlon is still under the now-defunct Corporate Debt Restructuring (CDR) scheme entered in January 2013 following a default of its then outstanding USD 209m bonds due October 2012 and INR 18bn bank debt. (2) In FY17, Suzlon generated free cash flow of INR 1.7bn on 1,573MW of turbine deliveries and INR 25bn EBITDA. The FCF generation after capex, interest and working capital needs is insufficient to cover Suzlon’s scheduled CDR debt repayment profile. (3) In fact, the repayment profile for FY20 and FY21 has increased per Suzlon’s 3Q19 investor presentation compared to the same repayment profile presented for the FY18 results. TABLE 1: SUMMARY CAPITAL STRUCTURE (INRm) AS OF 31 DECEMBER 2018 Instrument Issue date Interest rate Maturity Outstanding (INRm) Outstanding (USDm) (1) Leverage Rupee term loans 11.00% - 15.00% 26,880 385 Working capital facilities 8.75% - 12.75% <1 year 33,540 481 Foreign currency loans 4.00% - 6.00% 4,270 61 USD 40m from EXIM bank - London Mar-14 LIBOR + 5.75% 18-Sep-20 USD 590.4m Credit facility from London branches of State Bank of India and EXIM bank 29-Apr-16 3.30% 28-Feb-23 39,580 569 Total secured debt 104,270 1,496 23.7x USD 546m Foreign currency convertible bonds due 2019 15-Jul-14 5.75% 16-Jul-19 12,340 172 Total debt 116,610 1,668 26.6x Cash and cash equivalents (2) 1,206 17 Net debt 115,404 1,651 26.3x Market capitalisation 29,259 404 Enterprise Value 144,663 2,055 EBITDA (LTM 9M19) 4,391 EV/EBITDA 32.9x Source: Debtwire, company reports. (1) USD / INR 69.78, as per 3Q19 company presentation. (2) Cash balance is taken as of 30 September 2018, as the company does not report 9M balance sheet. (3) Refer to detailed capital structure on page 8.
Transcript
Tearsheet DW-APAC 28-Feb-19 Page 1
Pre-restructuring report 28 February 2019 India
Suzlon Energy Limited Renewable Energy
DEBTOR SUMMARY
Promoter Tulsi Tanti and his family
Sector Renewable Energy
Total debt (9M19) INR 117bn
(USD 1.67bn)
LTM 9M19 EBITDA INR 4.39bn
Leverage (LTM 9M19) 26.6x
Source: Debtwire, Company filings
ASIA CREDIT RESEARCH
Anjali Agarwal India Credit Research Manager - Debtwire Asia [email protected]
Suzlon Energy Ltd, a Pune, India-based wind energy equipment manufacturer and service provider, is facing another liquidity crisis(1) ahead of the 16 July maturity of its USD 172m (INR 12.3bn) outstanding out-of-the-money foreign currency convertible bonds (FCCBs).
Management is reportedly engaged in a discussion with a leading rival that conceivably could ameliorate liquidity concerns. India’s CNBC-TV reported on 22 February that Danish wind turbine manufacturer Vestas Wind Systems A/S is in discussions to take control of Suzlon, including by buying out promoter Tulsi Tanti (19.8% stake) and investor Dilip Shanghvi (18.6%) and then launching an open offer for the remaining equity. The report maintains that debt reduction would be the main purpose of the deal and as such, lenders will play a crucial role. In our view, a deal that puts Suzlon into the hands of a well-capitalised world market leader in wind turbines will be a game changer. At this stage, it is too early to speculate whether such a transaction is possible, how Vestas could deal with Suzlon’s enormous debt load and what value could be generated from the potential synergies.
However, were the Vestas deal to fail to materialize — neither side has commented on it yet — Suzlon’s prospects appear bleak. With deliveries of wind powered turbines expected to sag in the coming quarters and limited other progress on asset monetisation (see page 3 for details), a bond restructuring looks increasingly likely, probably as a term out (explained below). Already in late 2018, management held informal discussions with Hong Kong-based FCCB holders to gauge interest in various methods to deal with the pending maturity, two sources familiar with the matter told Debtwire.
Before the Vestas news, other reports indicated that Suzlon was looking at deals to sell off a portion of its business. In December 2018, Economic Times reported that Suzlon was in talks over the sale of a minority stake in its Indian Operations & Maintenance Services (O&M) business in order to
pare down debt and repay the FCCBs. The report added that management was also readying a backup plan to raise secured loans against the O&M business in case the sale transaction dragged on. During the 3Q18 earnings call on 8 February, management specifically mentioned that it was in talks with lenders on a debt repayment plan linked to a potential asset-sale targeted for completion by March.
Even were Suzlon able to close the sale by then, why would its lenders allow asset sale proceeds to be used first to repay subordinated offshore debt? That would be especially glaring given that the lenders agreed to a long term-out as part of a corporate debt restructuring process (CDR) initiated in January 2013 and the O&M business is clearly Suzlon’s best cash-generating asset.
As such, Suzlon’s next move — if a deal with Vestas or for the sale of the O&M business is not reached in time — might need to be to work with bondholders on a potential term out. But that would only provide a short-term solution. The fact remains that Suzlon’s debt burden remains too high even if deliveries for wind turbines were to return to the levels last experienced in FY17(2), before the wind turbine market was blown over by a change in India’s renewable energy tariff regime.
The pressure is clearly on. Earlier this month, Suzlon was forced to issue a statement denying rumors that it had defaulted on debt. But the statement specified only that the company was regular in servicing debt for “January” without mentioning other periods. Regardless of whether the company is current on its obligations, there is significant risk that it will not be able to service debt in the near future because the capital structure is simply unsustainable. A debt maturity profile provided by the company (see page 7) shows INR 8bn debt coming due in the next 15 months against only INR 1.2bn cash as of end September 2018(3). Cash from operations is likely to be significantly negative considering that interest expense significantly exceeds EBITDA.
Over the longer term, bank lenders should be prepared to take haircuts either through a formal
bankruptcy process or out-of-court to create a smaller, nimbler Suzlon able to compete despite — as Debtwire expects — a steadily declining market share from new auction orders (see page 7).
Continued on page 2
(1) Suzlon is still under the now-defunct Corporate Debt Restructuring (CDR) scheme entered in January 2013 following a default of its then outstanding USD 209m bonds due October 2012 and INR 18bn bank debt.
(2) In FY17, Suzlon generated free cash flow of INR 1.7bn on 1,573MW of turbine deliveries and INR 25bn EBITDA. The FCF generation after capex, interest and working capital needs is insufficient to cover Suzlon’s scheduled CDR debt repayment profile.
(3) In fact, the repayment profile for FY20 and FY21 has increased per Suzlon’s 3Q19 investor presentation compared to the same repayment profile presented for the FY18 results.
TABLE 1: SUMMARY CAPITAL STRUCTURE (INRm) AS OF 31 DECEMBER 2018
Instrument Issue date Interest rate Maturity Outstanding
(INRm) Outstanding
(USDm)(1) Leverage
Rupee term loans 11.00% - 15.00% 26,880 385
Working capital facilities 8.75% - 12.75% <1 year 33,540 481
Foreign currency loans 4.00% - 6.00% 4,270 61
USD 40m from EXIM bank - London Mar-14 LIBOR + 5.75% 18-Sep-20
USD 590.4m Credit facility from London branches of State Bank of India and EXIM bank 29-Apr-16 3.30% 28-Feb-23 39,580 569
Source: Debtwire, company reports. (1) USD / INR 69.78, as per 3Q19 company presentation. (2) Cash balance is taken as of 30 September 2018, as the company does not report 9M balance sheet. (3) Refer to detailed capital structure on page 8.
Avoid bankruptcy at all cost. Excluding a long-shot potential Vestas deal structure, we think that the company’s asset monetisation plans, even if completed on time, will leave negligible funds available to redeem the unsecured FCCBs because of the significant amount of higher ranking secured CDR debt. Suzlon’s promoter, Chairman Tanti, would want to avoid a National Company Law Tribunal-overseen insolvency process since restrictions on promotors regaining control of a bankrupted company mean he would lose Suzlon.
Similarly, FCCB holders may also want to avoid an NCLT process because there is a strong possibility that Suzlon does not have enough distributable value to fully compensate secured lenders much less unsecureds. Applying Debtwire estimates for FY20 EBITDA against the median EV/EBITDA multiple of wind turbine peer companies (see Table 3), shows that Suzlon’s EV should be around INR92bn. The company reported INR 104bn secured debt as of 31 December 2018.
In our view, FCCB holders could be better off receiving some upfront cash and then exchanging into a new FCCB with a lower conversion premium, which would provide equity upside in the event of an industry rebound, or if a Vestas deal is realised at a later date. In the event that industry dynamics take a turn for the worse, exchanging into new bonds may allow FCCB holders to clip a few coupons before a more holistic restructuring may be required.
Continued on page 3
TABLE 2: FY20 FORECAST BASED ON ORDER BOOK (INR m)
Year ending 31 March 9M19 Low Base High Notes
Volume for wind turbines 348 933 1,037 1,244 752MW from SECI 3 and 285MW from SECI 4 to be commissioned in FY20. 328MW Adani and
50MW Atria Powers orders may be executed towards end FY20 (18 month time lag assumption).
Average selling price (INRm per MW) 57 53 55 57 INR52.5/MW per Maharashtra regulatory commission order in July 2018. Suzlon historically records slightly
higher due to revenues from EPC and installations.
Revenue from sale of wind turbines 19,966 48,998 57,035 70,931
Installed base 12,383 13,333 13,437 13,644 End-December installed base adding deliveries for FY20
Suzlon Global Services - O&M 11,160 12,400 14,880 Base case calculated as INR1m of revenue per MW of installed base in previous year in line with FY17 & FY18.
Other O&M 6,381 6,381 6,381 Expect overseas installed base to be relatively stable.
Revenue from operations and maintenance
14,292 17,541 18,781 21,261 Annuity like model, estimated from past 10 quarters average of INR 4.4bn per quarter,
followed by a 10% growth in FY20 with increase in commissioning volumes.
Revenue from forging segment 2,444 3,733 4,148 4,978 4x deliveries based on historical trend.
Revenue from other segment 588 784 784 784 Mainly solar and power generation. Other revenue being 9M19 annualised which had limited solar delivery.
Total revenue 35,573 71,056 80,748 97,953
EBITDA Margin 7.4% 10.0% 14.5% 20.0% Based on historical trend of margins on the delivered volume
Consolidated EBITDA 2,650 7,106 11,710 19,591
Capex -3,733 -4,148 -4,978 Estimated on the basis of average INR 4m per MW incurred in FY16, FY17 and FY18, post Senvion sale
Cash interest -8,909 -8,909 -8,909
FCF -5,537 -1,347 5,704
Total debt 116,610 116,610 116,610 116,610 Total debt outstanding as of 31-Dec-18.
Total debt/EBITDA 20.0x 16.4x 10.0x 6.0x
EBITDA/cash interest 0.8x 1.3x 2.2x
Source: Debtwire, company filings
TABLE 3: COMPS, USD m
Company Ticker Enterprise
Value
Latest LTM
EBITDA
1 year Forward EBITDA
Forward EV/EBITDA multiple
Latest LTM
Revenue
1 year Forward Revenue
Forward EV/Revenue Multiple
Total debt
Net debt Total Debt/
EBITDA
Net Debt/EBITDA
Suzlon Energy Ltd(1) SUEL IN 2,055 63 168 12.2x 825 1,157 1.8x 1,668 1,651 26.6x 26.3x
Note: Numbers are based on consensus estimates apart from Suzlon.
Source: Factset, Debtwire (1) The forward multiples are for FY20 ending March 2020. (2) The multiples are for FY19 ending December 2019. (3) The multiple is based on FY19 ending September 2019.
TABLE 4: SUZLON EQUITY VALUATION (INR m) Year ending 31 March Low Base High Turbine deliveries 933 1,037 1,244
Suzlon FY20 EBITDA 7,106 11,710 19,591
Peer multiple 7.7x 7.9x 9.1x
EV 54,716 92,509 178,278
Suzlon FY20 revenues 71,056 80,748 97,953
Peer multiple 0.6x 0.9x 1.0x
EV 42,634 72,673 97,953
AVERAGE 48,675 82,591 138,116
Total debt 31/12/18 116,610 116,610 116,610
Cash 30/9/18 -1,206 -1,206 -1,206
Net debt 115,404 115,404 115,404
Recompense liability 31/3/18 10,994 10,994 10,994
Equity value 0 0 11,718
Shares out 5,320 5,320 5,320
Implied equity value per share (INR) 0.0 0.0 2.20
Source: Debtwire, company filings (1) The low, base and high multiples are based on the first quartile, median and third quartile of peer multiples on table 2.
Tearsheet DW-APAC 28-Feb-19 Page 3
Pre-restructuring report 28 February 2019 India
Suzlon Energy Limited Renewable Energy
Term-loan restructuring. Even with anticipated EBITDA growth, Suzlon will likely need to term out its loans unless the O&M division is monetized. Debtwire estimates that FY20 EBITDA could return to around INR 12bn assuming full ownership in the Indian O&M business compared to estimated EBITDA of INR 3bn in FY19 (9M actual plus Debtwire’s 4Q estimate) and actual EBITDA of INR 10bn in FY18. The expected FY20 rebound is the result of the market having time to adjust to the auction-based pricing regime India introduced in February 2017 to replace a fixed feed-in tariff regime (see industry section on page 6). Our FY20 EBITDA forecast is based on the following:
(1) ~1GW Wind Turbine Generator (WTG) deliveries, based on Suzlon’s existing order book(1) and factoring in a 18-21 month gap between orders and deliveries; (2) 20-25% capacity utilisation, implying a 6% EBIT margin, similar to FY18 levels; (3) O&M growth in line with the increase in Suzlon’s installed base, resulting in EBITDA contribution of around INR 4bn (FY18 INR 3.3bn, FY19e INR 3.5bn). Even at these EBITDA levels, we expect gross leverage and interest cover metrics to remain stressed, at 10.0x and 1.3x, respectively. After deducting interest and capex, Suzlon should still burn free cash flow of ~INR 1.3bn (see Table 2). As such, unless the O&M business can be monetised in time, Suzlon’s INR 8bn (USD 114m)(2) term-debt installments over the next 15 months may need to be rescheduled even if the FCCB’s don’t need to be repaid in July 2019.
Post O&M monetization. Suzlon Global Services (SGSL), the Indian O&M business, is Suzlon’s cash cow and contributed INR 4.4bn EBITDA or 45% of Suzlon’s total EBITDA in FY18 whilst the overseas O&M business was lossmaking(3). A CARE rating report on SGSL dated 11 December 2018 stated that Suzlon obtained No Objection Certificates from 69% by value of the 75% required from
existing CDR lenders to release SGSL as co-obligor of the restructured loans. During Suzlon’s 3Q19 earnings call, management specifically mentioned that it was in talks with lenders on a debt repayment plan linked to a potential asset sale. We should not expect CDR lenders to willingly release SGSL as a co-obligor unless part of the restructured loans could be refinanced at the SGSL level or were the release to allow for a stake sale in which the proceeds will be applied to repay the lenders, leaving nothing for FCCB holders(4) based on Debtwire’s estimate of the O&M business’ value. Assuming Suzlon is able to sell a 49% minority stake in SGSL(5), Debtwire estimates that the net proceeds would be INR 23bn-INR 28bn on 10-12x FY20e EV/EBITDA(6) compared to the ~18x implied by the valuation cited in the 10 December 2018 Economic Times report. Assuming the proceeds are first to be applied to repay/prepay the INR 27bn outstanding CDR term loans, paring debt down by 20%-30%, nearly in line with management guidance, Debtwire estimates that leverage ratios would not materially improve once SGSL’s EBITDA is proportionately consolidated. Post a minority stake sale, Suzlon will remain a ~9.5x levered company that still burns free cash flow (see Table 5).
Poor monetisation track record. SGSL has been for sale for more than two years in some form. According to a moneycontrol news article in February 2017, Suzlon wanted to raise INR 20bn through an IPO of the subsidiary. Then in November 2017, Livemint reported that Suzlon was looking to raise USD 250m (INR 17.8bn) by selling a ‘significantly-sized’ minority stake. The latest news of a potential stake sale was in a 10 December 2018 Economic Times article which reported that Suzlon was looking to sell up to 49% of SGSL for INR 39bn, implied from a valuation of INR 80bn for the whole business. The article adds that the company is readying an INR 50bn term loan to be secured by the business if it can’t get a sale done in time. While the Indian O&M business has performed well lately, bidder interest would be almost certainly reduced by the prospect
of not receiving majority control over the asset.
Haircut needed. Regardless of the stake sale of its O&M arm, Suzlon will remain highly leveraged and likely require a sizable haircut from bank lenders over the medium term to remain competitive (again excluding a long-shot Vestas deal structure). Even at FY20e EBITDA of ~INR 12bn, current interest expense of ~INR 9bn represents 75% of EBITDA, leaving little cash left for capex (Debtwire estimates at ~INR 4bn p.a.) and principal debt repayments (INR 6bn in FY20 per Suzlon’s 3Q19 investor presentation). Lately, management also appears to become cognizant of its urgent need for capital structure support due to the poor business prospects. As in the notes for the 2Q results, the directors in 3Q highlight the going concern risks but changed the stated solution to include “raising equity capital and refinancing of certain debt” from “cost reduction and increase in sales volume, to make its operations profitable…” cited in the previous quarter.
Continued on page 5
(1) Orderbook consist mainly of SECI 3 & 4 commissioning.
(2) See maturity profile graph on page 7.
(3) Calculated by taking Suzlon’s reported INR 3.3bn EBITDA for its O&M segment which includes SGSL and deducting SGSL’s EBITDA of INR 4.4bn as calculated from its separately filed FY18 financial statements.
(4) Salient terms of the Master Restructuring Agreement as disclosed in the FCCB information memorandum date 17 June 2014 state that CDR lender approval is required for an asset sale.
(5) 50.5% of SGSL equity is pledged to CDR lenders, hence any stake sale/IPO is likely only for the minority 49.5% stake. The Economic times report from December also stated the company was looking to sell up to a 49% stake.
(6) We think 10-12x is a fair multiple for a stable business with limited hard assets except for a steady cash flow stream. While there were no publicly listed comparable wind O&M companies, we think that valuations in the Indian telco tower space offers a useful comparison in terms of steady cash flow and reported EBITDA margins.
TABLE 5: SUZLON GLOBAL SERVICES VALUATION
Global Services FY20 EBITDA (est.) 4,712
INRm Scenario 1 Scenario 2 Scenario 3 Comment
EV/EBITDA multiple (x) 10.0x 12.0x 18.0x
Enterprise Value 47,120 56,544 84,816
49.5% stake sale value 23,324 27,989 41,984 50.5% is pledged to lenders.
Debt repaid
Rupee loans 3,556 0 0
As per management: the debt, excluding FCCBs, will be reduced by 30% - 40% through asset monetisation which is expected to conclude by end-FY19 .
Working Capital facilities 33,540 33,540 33,540
Foreign currency loans 4,270 3,161 0
USD 590.4m Credit facility 39,580 39,580 28,746
USD 546m FCCBs due 2019 12,340 12,340 12,340
Total Debt 93,286 88,621 74,626
Debt reduction % -20.0% -24.0% -36.0%
Interest expense (est) 6,363 5,903 5,348
Pro-forma proportionate EBITDA for entire business—post stake sale
9,377 Based on Suzlon FY20 base case INR 11.7bn EBITDA from Table 3.
Free cash flow -1,134 -673 -118 Pro-forma EBITDA less interest and base case capex.
Market squeeze. Demand for wind-capacity bids was weak in FY18 following India’s transition to an auction-based system, which reduced tariffs to INR 2.4-INR 3.5 per kWh from INR 4-INR 6 under the feed-in tariff mechanism. Following the transition period, we expect FY20 and FY21 turbine deliveries to increase following the pick up in auction activity in FY19. That is why Debtwire estimates that Suzlon’s WTG deliveries would return to ~1GW(1) in FY20 compared to only 400-450MW(2) for FY19e. However, even at ~1-1.5GW, Suzlon’s facilities would be running at only ~20%-25% capacity, which is far from breakeven. Suzlon Chairman Tanti estimated manufacturing sustainability at 50% plant utilisation, as reported by the Economic Times on 21 January 2019. Based on that comment, Debtwire estimates that Suzlon needs to deliver at >50% utilisation, or ~2GW of its 4.2GW capacity per year to sustain its current debt load of INR 117bn(3). This target looks optimistic going by the growth expectations of the industry as laid out in Suzlon’s 3Q19 investor presentation in February 2019 and our expectations of Suzlon’s market share. The company forecasts that 8GW of new wind capacity will be commissioned in FY20 in India, which will grow to 12GW by FY22. This compares to only 1.1GW for the 10 months ending 31 January 2019.
Even if industry as a whole achieves these targets, Suzlon will find it challenging to achieve 2GW deliveries because recent new bidding activity suggests that the company’s market share is vulnerable. Suzlon’s market share in recent auctions (SECI 4 and state bids) was only ~14% and 23% on average across all auctions that have been contracted under the new regime (see page 7 chart). This compares to Suzlon’s 35% market share of India’s installed base, which includes orders executed under the previous feed-in tariff regime. Applying the same 14% market share would lead to only ~1.6GW annual deliveries for Suzlon in FY21 and FY22. Suzlon’s market share could potentially decrease even further, considering Senvion S.A. plans to re-enter the Indian market(4) and a higher proportion of future auctions may come from offshore projects, where Siemens Gamesa is the clear market leader.
Questionable earnings quality. Suzlon’s 3Q19 turbine deliveries came in at 67MW, down 47% QoQ and 74% YoY. Despite the low volumes, the turbine-manufacturing WTG division reported INR 1.1bn in operating profit, a significant turnaround from the ~INR 4bn loss per quarter in 1Q19 and 2Q19 even though delivery volumes were double the amount in those quarters versus 3Q. On the
3Q19 earnings call, management justified the seeming paradox by citing the increased recognition of supply and installation contracts, which are booked based on the percent-of-completion method, giving management some discretion on how and when to recognize revenues. We do not know if Suzlon has taken a more aggressive revenue recognition policy but for the first time in a recent quarterly investor presentation, Suzlon stated in it 3Q19 presentation that WTG revenue included revenue recognised on completion of relevant milestones.
Continued on page 6
(1) Based on expected commissioning of SECI 3 & 4 in FY20 and SECI 6 in FY21 among others, see graphs on page 7 .
(2) Debtwire estimates that 4Q19 WTG deliveries should be similar to 67MW reported for 3Q19 due to low commissioning activity following the transition period from feed-in tariffs to an auction regime.
(3) Debtwire estimates that at 2.1GW of deliveries, Suzlon could generate INR 33bn EBITDA at a higher margin of 20%, implying a gross leverage of ~3.5x.
(4) Senvion’s total order book in India has reached 1 GW after entering the market in late 2016, as reported by Senvion’s press release on 10 January 2019.
HOW IT GOT HERE
On 4 October 2012, Suzlon missed the redemption on two FCCBs totaling USD 209m (inclusive of redemption premium), triggering cross-default provisions across its other offshore debt, including USD 90m due-2014 and USD 175m due-2016 FCCBs. This was in addition to INR 18bn onshore debt defaulted on. This wasn’t the first time Suzlon had experienced financial difficulty. It had been overdue on INR 10.8bn debt in FY10, although that was quickly cured through a refinancing. As such, the 2012 default marked a major turning point for the company by necessitating a major restructuring of both its onshore and offshore debt.
The default occurred a few months after the Indian government upended the renewables market by withdrawing some of the renewable power-based incentives, causing a huge decline in Suzlon’s sales. However, the company’s issues started well before that. It overleveraged itself to acquire overseas assets (since sold off) and burned through a tremendous amount of cash even in the supposedly good years.
In January 2013, Suzlon finally entered into the now defunct corporate debt restructuring (CDR) mechanism(1) with its onshore secured lenders. In July 2014, USD 378.4m principal defaulted FCCBs plus accrual was exchanged into new USD 547m FCCBs due July 2019 with a significantly reduced conversion price. A surge in Indian equity prices following a government change and strong growth in the Indian domestic market in FY16-FY17 enabled holders to cash out quickly by exercising their then-in-the-money conversion options.
But regulatory changes in FY18 (see page 6 on industry) once again upended the market leading to a huge decline in revenue — and equity prices.
Restructuring: Under the CDR deal signed in January 2013, the bank lenders agreed to restructure INR 95bn (USD 1.8bn) debt, including by terming out maturities by up to ten years, reducing interest rates by around 300bps, implementing a two year moratorium on principal and interest payments and providing additional working capital facilities. In addition, INR 13bn loans were converted into a 24.3% equity stake, as disclosed in Suzlon’s 2014 annual report.
The CDR mechanism also required the company to pay down USD 1.2bn in debt (INR 77bn) using proceeds from asset sales or an equity injection by March 2016. Suzlon came through on this part of the agreement using the INR 70bn cash proceeds from the EUR 1bn (INR 70bn) sale in April 2015 of one of its European acquisitions, German wind turbine developer Senvion SE. However, the company never formally exited the CDR oversight because it has yet to pay “recompense” to lenders. The exact amount the company was expected to pay is not clear but in Suzlon’s 2018 annual report, other liabilities of INR 12bn primarily includes recompense provisions.
It took longer for Suzlon to come to terms with offshore bondholders, finally winning consent in July 2014, one year and eight months after the initial default. The new FCCB had a conversion price of INR 15.46, 36% below the company's share price at the time, and a step-up coupon which ranged from 3.25%-5.75%.
Post Restructuring: While Suzlon initially continued to struggle financially post the restructuring, it finally seemed to be on a good path in FY17. Having paired down its oversized debt load with the proceeds of the Senvion sale, the company was able to take advantage of a pick up in domestic demand, increasing EBITDA 2.3x YoY to INR 25bn, on 34% YoY revenue growth, to INR 127bn. But that was as good as it got.
In FY18, the Indian government transitioned from the fixed power tariff system to auction-driven pricing — the first auction was held in February 2017 — resulting in lower returns for power producers. For Suzlon, this meant a 40% YoY drop in volumes, to 943 MW in FY18. Conditions continued to worsen, with 9M19 volumes 59% lower YoY, at 348MW, resulting in a 68% decline in EBITDA for 9M19, to INR 2.7bn. As of 31 December 2018, the company reported total debt of INR 117bn including USD 172m (INR 12.3bn) FCCBs due July 2019. Suzlon does not report quarterly cash flow numbers, but for LTM 9M19, it had INR 15.4bn in finance costs, which was 3.5x of INR 4.4bn in LTM EBITDA.
(1) Since February 2018, the CDR mechanism was scrapped with Reserve Bank of India directing the lenders to push corporates into bankruptcy if they have at least INR 20bn in debt and have already been in default for 180 days.
Suzlon Energy Limited is a Pune, India-based developer and service provider of wind-turbines (78.3% of FY18 revenue) and solar systems (18.3% of FY18 revenue). For 9M19, Suzlon reported no solar volumes and in turn zero revenue from the segment. Suzlon has two wind-related business lines. The manufacturing, supply of wind-powered turbines and related engineering, procurement and installation projects accounted for 55.8% of 9M19 revenue. The turbines installations are delivered to independent power producers, who have power purchase agreements in place with distribution companies. Suzlon manufactures wind turbines and its components from 14 facilities located in the Indian states of Maharashtra, Gujarat, Tamil Nadu and Karnataka and two facilities in China and United States.
Suzlon also has an operations and maintenance (O&M) business, which services the power producers (39.9% of 9M19 revenue) including by providing replacement parts for turbines, repairing damages and servicing equipment to counter regular wear and tear. As of 31 December 2018 (9M19), Suzlon had installed 18.4 GW of wind generating capacity, of which 12.4 GW was in India and remaining was spread across America, Asia (excl. India), Australia, Europe and Africa. The company’s nascent solar business has an installed capacity of 340 MW, supplying power to the Indian states of Telangana (210 MW), Maharashtra (70 MW) and Rajasthan (60 MW) as of 31 March 2018.
Suzlon, incorporated in 1995 and listed on the National Stock Exchange and the Bombay Stock Exchange in October 2005, was 19.8% owned by the founder Tulsi Tanti and his family as of 31 December 2018. Another 18.6% -- down from a 23% stake acquired in February 2015 -- was held by the family of Dilip Shanghvi, the founder of the generic drug maker Sun Pharmaceutical Industries Ltd. The Shanghvi family acquired a 23% stake in Suzlon for INR 18bn. Per the February 2015 Shareholder Agreement, Tanti and Shanghvi are considered as Persons Acting in Concert.
INDUSTRY OVERVIEW
India’s Ministry of New & Renewable Energy (MNRE) has set a target to install 60GW of wind capacity by 2022 and for wind power to represent ~14% of India’s total installed power generation capacity, up from ~10% currently. During the five years between FY12 and FY17, the country’s installed wind capacity grew at a CAGR of ~13% from 17.4GW to 32.3GW. However, growth slowed markedly after FY17, with added capacity of only 1.8GW in FY18 and 1.1MW for the 10 months to 31 January 2019, representing a CAGR of ~4.6%. (see charts on page 7). As of 31 January 2019, industry installed base stood at 35.1GW. This slower growth rate after FY17 was due to the shift to auction driven tariffs in early 2017. Under the auction tariff regime, the lowest bidders are awarded the projects, which reduced actual tariffs to as low as INR 2.43/kWh from the traditional fixed level of INR 4-INR 6 per kWh. This price fall prompted independent power producers (IPPs) to reassess the viability of projects, reducing orders from original equipment manufacturers (OEMs) such as Suzlon.
We believe the industry target to build an additional ~25GW capacity to meet the 60GW goal by FY22 looks optimistic because A) lower tariffs under
auction regime may lead to lower IRRs and reduced commissioning activity and B) delays in commissioning due to land lease issues, particularly in Gujarat.
The targeted 25GW growth means that an average of ~8.3GW needs to be added annually. That is triple the average annual capacity additions between FY11 and FY18, and 51% above FY17 which was by far the best year over that period (see chart on page 7). While the lower tariffs may make wind power a more competitive energy source, it would also reduce project IRRs for IPPs. Sites that were profitable under the earlier tariff regime could now be uneconomical. Anecdotally, the NTPC and SECI 5 auctions held in August/September 2018 were downsized to 1.2GW from 2GW due to tepid bidding, and winning tariffs fell to INR 2.44/kWh compared to INR 3.46 for the first auctions held in February 2017.
As it is, the wind power industry is facing various regulatory issues and approvals relating to land leases, power purchase agreements (PPAs) with distribution companies (discoms), and obtaining grid connectivity for transmission of power, all of which impacts the commencement of projects. In December 2018, the Economic Times reported that
the Gujarat state had refused to grant land lease for SECI projects and instead wanted to keep the land for power projects supplying the state’s own power utility company, Gujarat Urja Vikas Nigam Ltd. More recently, Economic Times reported that the Gujarat state will set up wind-solar hybrid parks for future SECI or centrally bid renewable projects, but didn’t say how the previously awarded SECI auctions will be treated. Suzlon’s management mentioned in the 3Q19 earnings call that 50% of the ~7GW of SECI auctions so far is expected to be commissioned in Gujarat. These projects are expected to be delayed due to land lease issues. State policy at Gujarat remains important to the development of wind energy as the state represent one-third of India’s wind energy potential sites, according to MNRE research (see Inox Wind 2018 annual report).
The lower tariffs for IPPs is also likely to put margin pressure on wind power OEMs such as Suzlon, as stated by CRISIL research in May 2017, soon after the auction regime was put in place. Eventually, lower tariffs could mean that OEMs could potentially earn less margin on turbine supply, installation and construction, as well as on long-term O&M service contracts.
TABLE 9: ACQUISITION / DISPOSALS TIMELINE Completion date
Acquired asset Amount
(INR m)(1) Amount (USD m)
Funding of acquisition
09-May-06 Acquisition of 100% stake in Hansen Transmissions International NV
for EUR 431.43m 25,026 549
Financed by a EUR 450m loan from ICICI Bank, SBI, Deutsche Bank AG and Barclays Bank
25-May-07 Acquisition of 35.8% stake in Senvion (f.k.a. RePower) for EUR 453m 30,853 609 Financed by a draw down under acquisition facility
June-Dec 2008 Purchase of 37.82% stake in Senvion increasing the total stake
to 73.65% 41,776 840 Financed by a draw down under acquisition facility
April-May 2009 Purchase of 16.85% stake in Senvion for EUR 205m increasing the
total stake to 90.5% 14,237 288 Financed by a draw down under acquisition facility
FY11-FY12 Purchase of remaining 9.5% stake in Senvion for EUR 63m 4,357 87 -
Total acquisition cost 116,249 2,374
Completion date
Disposal in Asset Amount
(INR m)(1) Amount (USD m)
Use of proceeds
11-Dec-07 EUR 440m from IPO proceeds of Hansen on the London
Stock Exchange, reducing Suzlon's stake in Hansen to 71.28% 26,608 645 For construction and manufacturing facilities in China and India
31-Dec-08 Sale of 10% stake in Hansen reducing the stake to 61.28% 4,772 96 -
19-Nov-09 Sale of 35.22% stake in Hansen for GBP 224m 16,725 370 Used for repaying balance amount of USD 780m on acquisition facility
13-Oct-11 Sale of remaining 26.06% stake in Hansen 8,900 179 -
29-Apr-15 100% stake sale in Senvion to Centerbridge for EUR 1bn and a
future earn out potential of EUR 50m 70,000 1,092 Repaid debt of INR 62.61bn
Total consideration from disposal 127,005 2,382 Source: Debtwire, company reports and press releases. (1) The amounts have been converted to the local currency as per the exchange rate on the date of transaction, if the company has not disclosed the INR amount.
ACTUAL WIND INSTALLED CAPACITY vs INDUSTRY TARGETS
Source: Debtwire, Press Information Bureau, Central Electricity Authority *Till 31 January 2019 ** Asper Suzlon's internal estimates given in 3Q19 presentation
INDUSTRY WIND AUCTIONS AS OF FEBRUARY 2019
Source: Debtwire, Press Information Bureau *The Suzlon market share for state auctions is calculated as an average of total state bid wins of 202 MW as per its 3Q19 presentation. SECI - Solar Energy Corporation of India, GJ - Gujarat, TN - Tamil Nadu, MH - Maharashtra
STATE –WISE WIND INSTALLED CAPACITY AS OF 31-DEC-18
Source: Debtwire, Press Information Bureau
INSTALLED CAPACITY ACROSS ALL SOURCES OF ENERGY
Source: Debtwire, Central Electricity Authority
Thermal63.9%Nuclear
1.9%
Hydro13.0%
Small hydro power
1.3%
Wind power10.1%
Bio power2.6% Solar
power7.2%
Andhra Pradesh
11.6%
Gujarat16.9%
Karnataka13.3%
Kerala0.1%
Madhya Pradesh
7.2%
Maharashtra13.6%
Rajasthan12.2%
Tamil Nadu24.6%
Telangana0.4%
2.33.2
1.7 2.1 2.33.4
5.5
1.81.1
2.0
8.0
11.012.0
0
2
4
6
8
10
12
14
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
*
FY
20
FY
21
FY
22
Installed capacity (GW) Industry target (GW)**
24% 13%* 25% 13%* 38% 13%* 14%
3.5 3.4
2.62.4 2.4
2.9
2.52.8 2.8 2.8
0
0.5
1
1.5
2
2.5
3
3.5
4
0
500
1,000
1,500
2,000
2,500
3,000
SE
CI 1
Fe
b-1
7
TN
Au
g-1
7
SE
CI 2
Oct
-17
GJ
De
c-1
7
SE
CI 3
Fe
b-1
8
MH
Mar
-18
SE
CI 4
Ap
r-1
8
NT
PC
Au
g-1
8
SE
CI 5
Sep
-18
SE
CI 6
Fe
b-1
9
Suzlon's share (MW) Auction size (MW)Tariff (INR per unit)
MATURITY PROFILE AS OF 9M FY19
1.56 6.39 8.36 9.27
45.15
0
10
20
30
40
50
FY19 FY20 FY21 FY22 FY23 &Beyond
Repayments (INRbn)
FY19-22 Repayments: 36%
64%
Source: Debtwire, company filings
SUZLON CUMULATIVE CAPACITY vs INDUSTRY INSTALLATIONS
6.2 7.4 7.8 8.2 8.6 9.5 11.3 11.9 12.4
14.217.4 19.1 21.1
23.426.8
32.334.0 35.1
0
10
20
30
40
50
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 9M19
Industry installations (GW) Suzlon's installed capacity (GW)
Source: Debtwire, company filings, Press Information Bureau
Tearsheet DW-APAC 28-Feb-19 Page 8
Pre-restructuring report 28 February 2019 India
Suzlon Energy Limited Renewable Energy
TERM LOAN LENDERS
Indian Overseas Bank, Union Bank of India, Bank of Baroda, Bank of India, Central Bank of India,
Andhra Bank, SBI, PNB, United Bank, Indian Bank, LIC, Corporation Bank, Canara Bank, Oriental Bank, Vijaya Bank, IDBI Bank, Dena Bank.
TABLE 10: DETAILED CAPITAL STRUCTURE (INR m) AS OF 31 DECEMBER 2018
Instrument Borrower/
Issuer Issue date
Interest rate
Maturity
Outstanding as of
31-Mar-18 (INRm)
Outstanding (USDm)(1)
Outstanding as of
31-Dec-18 (INRm)
Outstanding (USDm)(2) Leverage Security
Rupee term loans
- 11.00% - 15.00%
24,073 369
26,880 385
Secured by first pari passu charge on all assets of the company. Also secured by personal guarantee of one
of the directors and manag-ing directors of the holdco.
For more details, refer AR18
SE Forge Ltd 11.30% - 12.35%
Sep-22 2,517 39
Suzlon Gujarat Wind Park Ltd
11.00% 543 8
Suzlon Power Infrastructure Ltd
11.00% 856 13
Working capital facilities
Suzlon Energy Ltd 8.75% - 12.75%
<1 year 37,668 578
33,540 481
Secured by first pari passu charge on all assets of the company. Also secured by personal guarantee of one
of the directors and manag-ing directors of the holdco.
For more details, refer AR18
Suzlon Power Infrastructure Ltd
11.00%
<1 year 64 1
Suzlon Global Services Ltd
<1 year 554 9
Suzlon Gujarat Wind Park Ltd
<1 year 118 2
SE Forge Ltd 10.95% - 12.05%
<1 year 491 8
Foreign currency loans - 4.00% - 6.00%
2,463 38
4,270 61
USD 40m from EXIM bank - London
Suzlon Wind Energy
Corporation Mar-14
LIBOR + 5.75%
18-Sep-20 1,304 20
Secured against receivables and guaranteed by AE Rotor Holding and Suzlon Energy
Ltd
USD 590.4m Credit facili-ty from London branches of State Bank of India and EXIM bank
AE Rotor Holding B.V.
29-Apr-16 3.30% 28-Feb-23 36,931 569 39,580 569
Secured by unconditional and irrevocable Stand-by Letters of Credit (SBLC) from State Bank of India.
The SBI SBLC is backed by SBLC issued by certain
Indian lenders and SBLC issued by certain overseas branches of domestic lend-
ers
Total secured debt 107,580 1,653 104,270 1,496 23.7x
Term loans from banks 442 7
Equipment financing foreign currency loan from Landes Bank
SE Forge Ltd EURIBOR +
5% Oct-22 536 8
Corporate guarantee from Suzlon Energy Ltd
USD 547m Foreign cur-rency convertible bonds due 2019
Suzlon Energy Ltd 15-Jul-14 5.75% 16-Jul-19 11,393 172 12,340 172
Total debt 119,950 1,840 116,610 1,668 26.6x
Cash and cash Equivalents(3)
5,811 89 1,206 17
Net debt 114,139 1,751 115,404 1,651 26.3x
Market capitalisation
29,259 404
Enterprise Value 144,663 2,055
EBITDA (LTM 9M19) 4,391 EV/EBITDA 32.9x
Source: Debtwire, company reports. (1) USD / INR 65.18, as per FY18 company presentation. (2) USD / INR 69.78, as per 3Q19 company presentation. (3) Cash balance is taken as of 30 September 2018, as the company does not report 9M balance sheet.
Tearsheet DW-APAC 28-Feb-19 Page 9
Pre-restructuring report 28 February 2019 India
Suzlon Energy Limited Renewable Energy
TABLE 11: PRODUCT DETAILS
Product manufactured Holding company % Manufacturing Location Capacity per annum
Wind Turbine Generators (WTG) Suzlon Energy (Tianjin) Ltd (25% held) Tianjin, China 480 WTGs
Source: Debtwire, Bond document dated 18 June 2014. As per company's FY18 AR, the company has total wind turbine manufacturing capacity of 4,200 MW per annum which is produced from 14 facilities in India. As of 30 September 2018, company had installed a total capacity of 18.1 GW.
Suzlon Energy Limited (India) USD 172m (INR 12.65bn) convertible bonds
5.75% due July 2019
Suzlon Energy Ltd, (Mauritius) (1)
Dilip Shanghvi and his family
(Persons acting in concert)
18.61% 19.79%
Public shareholders and others
61.60%
100%
Suzlon Wind Energy Limited (UK)
100%
Suzlon Generators Ltd
75%
Suzlon Energy (Tianjin) Ltd
(China)
25%
AE Rotor Holding B.V.
(The Netherlands)
92.67%
100%
SE Drive Technik GmbH
(Germany)
100%
Suzlon Energy B.V (The Netherlands)
SE Blades Technology B.V
(The Netherlands)
100%
100%
Valum Holding B.V. (The Netherlands)
100%
Suzlon Energy A/S (Denmark)
99%
Suzlon Wind Energy Corporation (USA)
100%
100%
100%
100%
SE Forge Ltd
USD 20m (INR 1.30bn) loan
from EXIM bank, London branch
Tulsi R. Tanti and his family
(Promoters)
INR 554.3m working capital
loan
INR 3.00bn ru-pee loans
INR 535.5m foreign currency
loan
INR 919.9m
rupee loans
Suzlon Gujarat Wind Park Ltd
Suzlon Power Infrastructure Ltd
USD 569.4m (INR 41.10bn) credit facility
from State Bank of India and Exim
Suzlon Rotor Corporation (USA)
Suzlon Project VIII LLC (USA)
INR 660.8m rupee loans
100%
100%
Indian Joint
Venture
Foreign Associates
Source: Debtwire, company filings. (1) Apart from the two subsidiaries, Suzlon Energy Ltd, Mauritius has 11 more subsidiaries which provide marketing, operation and maintenance services to the wind projects.
(2) Suzlon Global Services is the operation and maintenance arm of the company and according to an 11 December Economic Times article, the company is in talks to sell up to 49% stake in the unit.
Note: The company manufactures renewable energy projects under a separate vehicle each, which once operational, is sold to the power producer. As of 31 March 2018, the company has classified 12 solar SPVs as held for sale. Of these, post 31 March 2018, company divested its entire stake in Amun Solarfarms, Avighna Solarfarms, Tornado Solarfarms, Prathamesh Solar-farms and Rudra Solarfarms for a total consideration of INR 1.58bn. Suzlon also has 7 independent wind power producers and 3 solar power producers which have not commenced opera-tions as of 31 March 2018.
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