The publicly traded prices of Suzlon Energy Ltd’s bonds and shares say it all. Its equity shares are near the all-time low, the price of its convertible bonds due in April 2016 continues to languish at about 50 cents on the dollar, and the pricing of a recent credit-enhanced bond reveals that investors were jittery despite being backed by a standby letter of credit from State Bank of India (SBI). Apart from the domestic banks behind the company’s corporate debt restructuring (CDR) programme, few investors seem to be pinning their hopes on the company’s revival.
Earlier this week, Suzlon raised $647 million through a five-year bond issue backed by SBI. This, coupled with the CDR programme that gives the company a two-year moratorium on interest and principal payments, should have brought some succour to investors. But they remain circumspect about the company’s prospects. According to a report in FinanceAsia, “The bond printed at a spread of about 175 basis points over SBI—described by one banker as the ‘widest guarantee premium in the market by far’.” One basis point is one-hundredth of a percentage point. The guarantee premium is the difference in yield investors demand over and above the prevailing yield for bonds issued by the bank providing the guarantee—in this case, SBI. The report adds, however, that according to a source, one credit-enhanced bond out of China printed at a premium of over 200 basis points in 2011.
But regardless of whether Suzlon’s guarantee premium is the highest or not, the fact remains that the premium demanded by investors was huge. Bonds backed by a bank are normally priced at almost the same yield as the guaranteeing bank.
The company will use the funds raised to replace overseas debt issued by REPower Systems AG as well as debt related to its acquisition, according to reports. It’s likely that this move may help the company better utilize the cash lying on the books of REPower, which will come as a welcome relief. Even so, the company’s foreign currency convertible bond liabilities are still to be addressed. And the company’s operations continue to be weak.
The domestic banks seem to be hoping that the breather they have provided Suzlon will help the firm get back on its feet and that it will then be in a position to start repaying its debts two years from now. The fact that many institutional investors across the bond, convertibles and equity markets don’t agree must worry them. And again, the decision to provide a credit guarantee may seem smart, since it doesn’t involve any cash outflow; but with this move, domestic banks have just increased their exposure to Suzlon. The only saving grace is that if Suzlon is successful with its turnaround, domestic banks can get a nice upside on their newly acquired 32% stake in the company in the CDR process.