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2 July 2020

Suzlon hangs on by skin of its teeth in turbine-maker market

Indian wind turbine manufacturer Suzlon has managed to keep its head above water, completing its debt restructure after years of speculation that the company could fall victim to the continuous wave of consolidation in the sector. But as European OEM’s pour into the country to make use of its low labor costs, finding a way back to profit may be a step too far for such an under-resourced supplier.

This debt restructuring success comes after Suzlon managed to satisfy the range of conditions set out by lenders, including a $52 million capital infusion. Through the agreement, the turbine maker claims that its debt level has been reduced alongside the associated interest, now 9% over 10 years, with immediate effect.

Chairman Tulsi Tanti stated that a “Consortium of lenders led by State Bank of India (SBI) and the company have worked together to protect the interests of all the stakeholders involved, thereby protecting the Indian wind energy sector, saving thousands of direct and indirect jobs, ensuring the survival of large number of micro, small and medium enterprises vendors and protecting around 13 GW of operating wind energy assets of the nation. This initiative takes us a step forward to stay self-reliant in manufacturing of wind turbines and its components, making India the supply chain hub for the global wind sector.”

In August last year, Suzlon fell into unplanned bankruptcy, defaulting on loan repayments, mostly issued by SBI. From the start of this, its owners held a firm belief that the company would emerge from bankruptcy protection and remain in business, with an initial inter-creditor agreement offering a potential way out. It even refused Vestas’ offer of €1 billion to acquire the company, with shareholders viewing the company’s assets as worth far more. There were initially some rumors of a potential deal with Canadian asset manager Brookfield Asset Management, possibly to acquire Suzlon’s O&M business, although this appears to have fallen through.

At the time, these assets amounted to $280 million a year in service revenues, an installed base of around 13 GW and a pipeline of a further 15 GW, split into 6 GW set for 2020 and 9 GW for 2021.

But with India acting as one of the global hubs for wind power, the domestic market has been unprecedently competitive. Prices have also been squeezed down at government auctions, deterring international developers, limiting the business seen on Indian soil over the past two years as prices choked Suzlon’s cashflow.

This cashflow problem has limited Suzlon’s R&D spending, and while turbines have been growing in size elsewhere – up to 14 MW for the latest offshore models – Suzlon’s largest turbine sits at a modest 2.6 MW. The longest Suzlon blade is a carbon fiber 63-meter blade, compared to General Electric’s 107-meter blade on its Haliade X and one 108 meters long from Siemens Gamesa.

Margins have been squeezed further as larger players like Siemens Gamesa establish a growing footprint in the country; the European giant held a 30% market share compared to Suzlon’s 19% in 2019. As a result, Suzlon posted net losses over a string of consecutive quarters, accruing a debt in excess of $1.6 billion by August 2019.

With the Indian government trying to protect its stake in its domestic wind power supply chain, SBI has agreed to split the debt into “sustainable and unsustainable” chunks, which will cut what Suzlon owes by over 70% in the near term. This is especially important for the country as it aims to reach 60 GW of installed wind capacity by 2022 – up from 38 GW today.

The initial debt of $16 billion was to be paid over 20 years. In the new agreement, Suzlon will pay just under $500 million in the first 10 years. The remaining debt will be converted into 0.01% optionally convertible debentures (OCDs) and 0.0001% compulsorily convertible preference shares (CCPS), to be paid by July 2040.

Along with the approved restructuring of debt in May, stakeholders also gave the go ahead to nine other proposals, including an increase in share capital, the issuance of preferential shares to debt holders, along with some convertible warrants – essentially a debt to equity swap – and for the sale of key company assets. Its capital could now rise to nearly $16 billion.

While this bundle of proposals may stop Suzlon tipping into immediate insolvency, the OEM will have a huge hill to climb in reforming its operations to become profitable, as margins in the wind industry continue to be squeezed. The company will have more headroom for ramping up operations, easing some pressure to allow cashflows and allowing a reduced breakeven point, but this will not detract from the competition brought by the growing presence of European OEM’s in India.

Between 2017 and 2018, seven turbine makers were pushed out of the market, followed by a further three by 2019. It wouldn’t take a huge leap of imagination to think that Suzlon could be next on the list. Suzlon dropped out of the top 10 turbine supplier ranking in 2018, primarily a result of reduced installations, by up to one third, in its home market. The company will be begging for some local content requirements to come into play, but the Indian government may be reluctant to do this if it wants to come even close to the outrageously ambitious renewables targets it has set for itself.