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Loss-making Suzlon Energy, which binged on overseas acquisitions with borrowed money
during the boom years of 2005-2008, is set to default on foreign loans worth more than $200
million after offshore lenders refused to give more time for repayment.
Suzlon's request to extend the date for repayment of $209 million worth of convertible bonds
by four months to February 11 was rejected by bondholders, the company said in a statement
on Thursday. The announcement sent its shares crashing by more than 5%. This would be the
biggest default by an Indian company after pharma major Wockhardt failed to pay
bondholders in 2009.
"I don't have enough resources to meet the obligation today. So, it's a potential default," a
senior company executive told ET.
The default may also have breached covenants on the company's FCCBs that mature in 2014 and
2016, and which are together worth $270 million, two people close to the development said.
Bondholders may seek early repayment on these two bonds, adding to the woes of the cashstrapped wind turbine maker that has been struggling to raise money and recover payments from
clients amid a sharp slowdown in wind energy sales.
Suzlon shares later recovered to end the day down 2% at Rs 16.20.
Suzlon is the world's fifth-largest wind turbine maker. In 2007, it purchased Germany's REpower for
around Rs 8,000 crore, in the process adding a debt of 14,000 crore. The subsequent slowdown in
wind energy sales and withdrawal of tax incentives in the budget pushed the company deeper into
the red. It has not made an annual profit in the past three years.
"The default would hurt Suzlon's creditworthiness. The company does not have further headroom to
raise loans," Ruchir Khare, analyst at Kotak Securities, said.
"It is not good news," the company executive quoted above added.
Lenders may Consider Restructuring
"But we will continue to engage with our bondholders constructively and progressively with a
solution-oriented approach," he added. In July this year, Indian lenders to Suzlon helped out when
the redemption of the first tranche of convertible bonds worth $360 million became due. But this
time they have declined requests for a similar arrangement.
But in a move that may give the company long-term succor, the lenders have agreed to consider
restructuring of Suzlon's debt to bring down its costs. "The current default of $220 million is not
much considering the company's overall debt profile. But it has other implications. We have to
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The bondholders' rejection came as a surprise to Indian lenders and the incident has brought into
focus the tension between the two. According to one lender, most bondholders were in favour of
acceptance, except a few, including investment management firm BlackRock.
"Some big bondholders felt that the conditions were lopsided. If we gave our approval but the
secured banks did not, then there was nothing to protect our interest," an executive with an
institution holding Suzlon's bonds told ET on condition of anonymity.
Some local bankers want REpower, Suzlon's German subsidiary, to be merged with the parent so
that Suzlon can use the cash on the German firm's books. But REpower is ringfenced by German
banks and they are opposed to the merger. Nayak added that if German banks are replaced by other
banks, a new loan agreement could be incorporated allowing the merger of the two companies. A
domestic lender said the FCCB holders were confident of a bailout by local banks like it happened in
July, but the local banks held firm. "But if the company is facing problem, everyone should share a
part of haircut. And this is what we wanted to convey to the FCCB holders," he added.
"We don't comment on details of individual bond issues," an executive of BlackRock said.
Imagine you are a lender. You are evaluating the creditworthiness of two potential
borrowers. The first borrower has very high debt levels that exceed his annual income, and
needs to borrow just to stay afloat. The second borrower hardly has any debt at all.
Naturally, the first borrower is a higher risk than the second one. So it would make sense as
a lender to charge the first borrower a higher interest rate as compared with the second
borrower, in order to compensate for the increased risk.
Now let's translate this example into the global debt crisis. Countries with high debt levels
should see rising borrowing costs, to compensate for the fact that they have a greater risk of
default. And this is the case for the European countries going through debt crisis. Greece,
Spain, Ireland, etc. have all seen their borrowing costs rise, as evidenced by the rising
government bond yields.
But somehow this logic fails when we apply it to certain countries. The US has a debt to
GDP ratio in excess of 100%, yet its 10-year bond yield is less than 2%. Japan has a debt to
GDP ratio over 200%, yet its bond yield is less than 1%. The UK has a bond yield less than
2% despite a debt to GDP ratio near 90%.
This is a case of record high debt levels and record low interest rates. Something funny is
going one here. Why is it that these countries have debt levels that are at similar levels as
compared with European countries going through problems, yet they can borrow so much
cheaper?
The main difference between these two groups of countries is the currency of their debt. The
US, Japan, and the UK all have their debt denominated in their own currency, for which they
can adjust interest rates and increase money supply. The peripheral Eurozone countries
have debt denominated in the euro, for which they have no direct control over the interest
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