Suzlon Energy Ltd. : Has the company come out of the red?

A case study

Dr. A. Attarwala &

Prof. C. S. Balasubramaniam

Keywords: Wind farms, Corporate Debt Restructuring (CDR), Foreign Currency Convertible

bonds (FCCB), Master Restructuring Agreement (MRA), Compulsorily Convertible Debentures

(CCD)

Abstract

Suzlon is a market leader in Renewable Energy Resources segment. It specializes in providing

total solutions in Wind Power Generation with cohesive integration of consultancy, design,

manufacturing, installation, operation and maintenance services. Suzlon started its journey in

1995 with a small project to supply wind turbine generators for a 3.34 MW wind farm project in

Gujarat, India and it became as the world's 5th leading, and India's and Asia's leading

manufacturer of wind turbines over the years of advanced research and development

commercialization and globalization . During the years of its growth, expansion and progress, the

company borrowed Foreign Currency Convertible Bonds (FCCB) from international banks to

finance its operations and due to poor performance and losses it became a defaulter to these

foreign lenders and a consortium of Indian Commercial banks. Crippled by poor sales, high costs

and bad debts, the company adopted a Corporate Debt Restructuring Scheme (CDR) and a

recovery path has been attempted to overcome the situation. This case study opens with a brief

history of Suzlon and analysis of its operating and financial performance over the last five years

since 2009 to 2014. The second part discusses the CDR scheme and its aspects as formulated by

RBI & the banks and how it became applicable to Suzlon. The third part analyses whether the

company has been successful in its performance since implementation of CDR. It concludes with

emerging perspectives and lessons for the banks/financial institutions/RBI corporate sector

executives /professionals and students .

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Introduction

Suzlon is a market leader in Renewable Energy Resources segment. It specializes in providing

total solutions in Wind Power Generation with cohesive integration of consultancy, design,

manufacturing, installation, operation and maintenance services. Suzlon started its journey in

1995 with a small project to supply wind turbine generators for a 3.34 MW wind farm project in

Gujarat, India. Since then, Suzlon has not looked back and today it ranks as the world's 5th

leading, and India's and Asia's leading manufacturer of wind turbines, with over 2,000 MW of

wind turbine capacity supplied in India and across the world..

Suzlon has developed and implemented several large-scale wind farms throughout India. In

Vankusavade, Maharashtra .Suzlon has developed a wind farm that is stretched over 29 km of

rugged mountainous terrain averaging over 1,000 meters above sea level. This wind farm has

566 WTGs and has an installed capacity of over 205 MW. Vankusavade wind farm successfully

demonstrated the viability of large, utility-scale wind farms in India. In Sanganeri, Tamil Nadu,

Suzlon is developing a wind farm with a planned capacity of over 500 MW. Similarly, in Dhulia,

Maharashtra, Suzlon is developing one of the largest wind farms of its kind in the world with a

planned capacity of over 1,000 MW once complete. .Suzlon has presence in all the major

international markets. United States, the largest market for wind energy worldwide farms. Suzlon

has also received major orders from Australia, Brazil, China, Italy, Portugal and South Korea. In

terms of global footprint, Suzlon's global team is spread across four continents: Europe, North

America, Asia, and Australia. Suzlon has its international business headquarters in Denmark,

Global Management Center in Netherlands, and research and development centers in Germany,

and Belgium. In North America, Suzlon has its US corporate headquarters in Chicago, Illinois

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and has offices across the continent to provide marketing, projects and service support. In Asia,

Suzlon has presence in India and China. Suzlon's office in Melbourne, Australia is responsible

for sales, marketing, project implementation and service support for the emerging Asia Pacific

Market. In spite of all these achievements in technology, well researched products, commanding

market share and a leader in the industry, Suzlon Energy has fallen to bad times in profits, poor

corporate performance, no dividends to the investors for several years and below par market

price to its shares and investors. It is now attempting to rise and come out of the red on account

of corporate debt restructuring (CDR) scheme provided by the banks which have assisted it. !

Here is the case study which discusses the above sordid and sad story of Suzlon Energy, a Zenith

company in wind energy technology and Wind farms!!

This case study opens with a brief history and achievements of Suzlon .The second part discuss

the CDR scheme and its aspects as formulated by RBI & administered by the banks/lenders. The

third part analyses its operating and financial performance over the last five years since 2009 to

2014 and attempts to understand whether the company has been successful in its performance

since implementation of CDR. It concludes with painting a few perspectives for the corporate

sector, banks/financial institutions and the RBI and lessons for the executives /professionals

students from the case study

I. The Beginnings and Achievements of Suzlon:

In 1990’s the family owned textile business of Mr. Tulsi Tanti and his brothers Vinod, Jitendra and

Girish was facing severe problems of irregular power supply and cost over runs. The Tanti brothers

were looking for an alternative solution for fulfilling the power needs of their textile business. The

brothers decided to purchase and install two windmills that would generate and fulfill the power

needs of their textile business. The brothers were impressed with the ability of these windmills to

generate requisite quality and quantity of cheap power in an environmentally friendly manner.

Looking at the tremendous potential of harnessing wind energy commercially, the Tanti brothers

exited from their core businesses and started the business of manufacturing and selling windmills by

the name of Suzlon Energy Limited headquartered at Pune. Since then, Suzlon energy has become

a leader in wind energy in the India, having a global presence in five continents with manpower

of over 13,000 people located in 14 countries. Its business model has range of services that

include development, manufacturing, marketing, EPC project delivery & operations and

maintenance of wind turbine generators around the world. It is Asia’s strongest growing fully

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integrated wind power company and ranks amongst the top ten in the world. Suzlon , in just a

decade of its operation, has installed over 3 Gigawatt of wind turbine capacity in projects around

the world. Suzlon has been the market leader in India for over eight successive years. It was

ranked as the 5th leading supplier of wind turbine generators (WTG) worldwide by BTM

Consult ApS in its annual World Market Update for 2006.Suzlon’s emphasis on higher

efficiency, reduced stresses, power quality, high performance and reliability, low operation costs,

and increased safety delivering high performance turbines ensuring increased returns on

investment. In 2011–12 Suzlon Energy commenced its maiden commissioning of its Amherst

Project in Nova Scotia, Canada. This Canadian Project deploys Suzlon latest S9X product series.

Major Achievements of Suzlon:

Fifth leading wind turbine manufacturer in the world

Won the Best Manufacturer by the World Institute of Sustainable Energy. Received the 'IPO of the Year' honor from the Euromoney and Ernst & Young-backed

Renewable Energy Finance  Forum. Awarded by the World Wind Energy Association for its contribution in the wind energy

sector. Suzlon bags Golden Peacock National Training Award 2008

In 2013–14 Suzlon received Top 100 CISO Award

II. CDR Mechanism in India

There are occasions when corporates find themselves in financial difficulties because of

factors beyond their control and also due to certain internal reasons. For the revival of

such corporates as well as for the safety of the money lent by the banks and financial

institutions, timely support through restructuring of genuine cases is called for. However,

delay in agreement amongst different lending institutions often comes in the way of such

endeavors. Based on the experience in countries like the UK, Thailand, Korea, Malaysia,

etc. of putting in place an institutional mechanism for restructuring of corporate debt and

need for a similar mechanism in India, a Corporate Debt Restructuring System (CDR )

was evolved and detailed guidelines were issued by Reserve bank of India on August 23,

2001 for implementation by financial institutions and banks.

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The Corporate Debt Restructuring Mechanism is a voluntary non-statutory system based

on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA) and the

principle of approvals by super-majority of 75% creditors (by value) which makes it

binding on the remaining 25% to fall in line with the majority decision. The CDR

Mechanism covers only multiple banking accounts, syndication/consortium accounts,

where all banks and institutions together have an outstanding aggregate exposure of

Rs.100 million and above. It covers all categories of assets in the books of member-

creditors classified in terms of RBI's prudential asset classification standards. Even cases

filed in Debt Recovery Tribunals/Bureau of Industrial and Financial Reconstruction/and

other suit-filed cases are eligible for restructuring under CDR. The cases of restructuring

of standard and sub-standard class of assets are covered in Category-I, while cases of

doubtful assets are covered under Category-II.

Reference to CDR Mechanism may be triggered by:

Any or more of the creditors having minimum 20% share in either working capital

or term finance, or

By the concerned corporate, if supported by a bank/FI having minimum 20% share

as above.

It may be emphasized here that, in no case, the requests of any corporate indulging in

fraud or misfeasance, even in a single bank, can be considered for restructuring under

CDR System. However, Core Group, after reviewing the reasons for classification of the

borrower as willful defaulter, may consider admission of exceptional cases for

restructuring after satisfying itself that the borrower would be in a position to rectify the

willful default provided he is granted an opportunity under CDR mechanism. The edifice

of the CDR Mechanism in India stands on the strength of a three-tier structure: 

CDR Standing Forum

CDR Empowered Group 

CDR Cell

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All references for corporate debt restructuring by lenders/borrowers are made to the CDR Cell. It

is the responsibility of the lead institution/major stakeholder to the corporate to work out a

preliminary restructuring plan in consultation with other stakeholders and submit to CDR Cell.

The CDR Cell makes initial scrutiny of the proposals received from the lenders/borrowers, in

terms of the general policies and guidelines approved by the CDR Standing Forum, by calling for

details of the proposed restructuring plan and other information and place for consideration of the

CDR EG within 30 days to decide whether restructuring is prima facie feasible. If found feasible,

the referring institution/bank takes up the work of preparing the detailed restructuring plan with

the help of other lenders, in conjunction with CDR Cell and, if necessary, experts engaged from

outside. If not found prima facie feasible, the lenders may start action for recovery of their dues.

The CDR Cell, the third tier of the CDR Mechanism in India, is mandated to assist the CDR

Standing Forum and the CDR Empowered Group (EG) in all their functions.. The legal basis to

the CDR System is provided by the Debtor-Creditor Agreement (DCA) and the Inter-

Creditor Agreement (ICA). All banks /financial institutions in the CDR System are

required to enter into the legally binding ICA with necessary enforcement and penal

provisions. The most important part of the CDR Mechanism which is the critical element

of ICA is the provision that if 75% of creditors (by value) agree to a debt restructuring

package, the same would be binding on the remaining creditors. Similarly, debtors are

required to execute the DCA, either at the time of reference to CDR Cell or at the time of

original loan documentation (for future cases). The DCA has a legally binding ‘stand still’

agreement binding for 90/180 days whereby both the debtor and creditor(s) agree to ‘stand

still’ and commit themselves not to take recourse to any legal action during the period.

‘Stand Still’ is necessary for enabling the CDR System to undertake the necessary debt

restructuring exercise without any outside intervention, judicial or otherwise. However,

the ‘stand still’ is applicable only to any civil action, either by the borrower or any lender

against the other party, and does not cover any criminal action. Besides, the borrower

needs to undertake that during the ‘stand still’ period the documents will stand extended

for the purpose of limitation and that he would not approach any other authority for any

relief and the directors of the company will not resign from the Board of Directors during

the ‘stand still’ period.

 

III. (a) Poor performance by Suzlon :

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The pre crisis performance of Suzlon , one of the global wind energy major was not that bad as

the crisis itself which began the company had poor operational performance due to multiple

reasons which began in 2011-12 when the FCCB loans were defaulted. Suzlon Energy, for the

quarter ended June 2012 has turned in a consolidated net loss of Rs 848.97 Crore (against a profit

of Rs 60.12 Crore in Q1FY12) even while its revenue for the period grew by 9% to Rs 4770.66

Crore. The net loss was largely on account of fixed overheads on expanded capacity which were

under-absorbed on account of lower sales as well as forex loss of Rs 91.53 crore compared to a

forex gain of Rs 58.67 crore in the corresponding previous period. But for higher other income

(up 140% to Rs 77.30 crore) and profit on sale of assets / Investments of Rs 44.65 crore (against

nil in Q1FY12) the loss would have been much higher.

Operational income (excluding other operating income) was higher by 10% but the value

of production was higher by 24% to Rs 5048.29 crore (6% higher than operating sales of

Q1FY13). Out of the 180 MW of WTG supply to US/Brazil, which was originally

scheduled for supply in Q4FY12, got delayed and they were earlier expected to be

supplied in Q1FY13. But even in Q1FY13 the company has only completed part of that

and the balance supply is expected to happen only in Q2FY13.

Consolidated total operational income (including other operating income) was higher by

9% to Rs 4770.66 crore on the back of part completion of US & Brazil deliveries which

got slipped from Q4FY12 during the quarter by Suzlon Wind as well as translation gain

on consolidation of RE Power figures on the back of rupee depreciation. Volume sales of

Suzlon Wind (excluding RE Power) stood at 150 MW compared to 437 MW in the

corresponding previous period.

Lower sales could not cover the fixed cost leading to a negative margin of 3.5% at

operating level compared to 11.3% in the corresponding previous period. Sales mix of

Suzlon Wind in terms of domestic: international was 40:60 compared to 70:30 in the

corresponding previous period.

As margin of domestic business are lower than the margin of US/Brazil, the fall in the

share international sales impacted margins. Further, lower capacity utilization and higher

material cost also added to pressure on margins. Material cost (as % to sales net of

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stocks) was higher by 1390 bps to 76% and the other expenses were higher by 190 bps to

16.6%. The staff cost was lower by 70 bps to 10.6%. Higher material cost was largely on

account of unbilled inventory as well as increase in prices of inputs.

Other income was higher by 140% to Rs 77.30 crore. The interest cost was up by 37% to

Rs 493.69 crore and the depreciation was lower by 26% to Rs 177.70 crore. Thus the

PBT before forex loss and EO was a loss of Rs 759.95 crore compared to a profit of Rs

24.86 crore in the corresponding previous period.

The Forex loss was higher at Rs 91.53 crore compared to gain of Rs 58.67 crore in the

corresponding previous period. The EO item for the quarter was an income of Rs 37.28

Crore compared to nil in the corresponding previous period. Thus the PBT (after EO) was

a loss of Rs 806.83 Crore compared to a profit of Rs 83.53 Crore in the corresponding

previous period. The taxation was higher by 233% to Rs 46.77 Crore. And thus at PAT

level it was a loss of Rs 853.60 Crore compared to a profit of Rs 69.49 Crore in the

corresponding previous period.

The share of profit from associates was nil for the quarter compared to a loss of Rs 12.36

Crore in the corresponding previous period. The minority interest was higher by 55% to

Rs 4.63 Crore. Thus the net loss is Rs 848.97 Crore compared to a profit of Rs 60.12

Crore in the corresponding previous period.

On standalone basis the sales for the quarter was lower by 59% to Rs 596.91 Crore. The

operating profit margin turned negative at 43.1% (vs. 18.7% in Q1FY12) with lower sales not

sufficient to recover fixed costs. As a result, there was a loss of Rs 257.47 Crore at operating

level as against a profit of Rs 275.22 Crore in the corresponding previous period. Eventually it

was a net loss of Rs 696.64 Crore compared to a profit of Rs 137.83 Crore in the corresponding

previous period. The standalone bottom-line was hurt by forex loss of Rs 205.99 Crore (a gain of

Rs 91 lakh in Q1FY12). Though there was an EO income of Rs 5.55 Crore (nil in Q1FY12) that

could not compensate the set back at operating level and at non-operating level.

The Indian Wind Energy Association (´InWEA) of which the Company is a member has filed a

civil appeal in the Supreme Court against an order of the Appellate Tribunal for Electricity in

regard to levy of Infrastructure Development Charges (IDC) by Tamil Nadu State Electricity

Board. The auditors have given a matter of Emphasis on non-provision of the IDC Charges

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aggregating Rs 64.80 Crore as at June 30, 2012. Based on a legal opinion, the Company /InWEA

have strong case in its / their favour. The company has sold its stake in Suzlon Engitech, a 100%

subsidiary of the company on June 28, 2012. The company has booked a profit on sale of

investment in SENL and the same has been shown under External Operations (EO) income in

Q1FY13. The proceeds of the sale have been received by July 26, 2012. The Group also

announced an agreement for the sale of its China manufacturing asset for US$ 60 million; the

sale is expected to conclude during the September-October, 2012, period. The Group made a

repayment of debt by Rs 250 Crore in Q1FY13; raised new debt facilities for USD 300 million in

July, the lowest interest bearing facility in the Group's debt basket; and achieved an interest rate

reduction of 2.5 per cent from key senior lenders. The Group met its commitments around its

June series of FCCBs, fully redeeming the bonds through a combination of new credit facilities;

internal accruals and the sale of wind farm assets in India. The Group announced a target of

reducing annual fixed operating expenses and manpower costs by 20 per cent by the end of

FY13.The Suzlon Group order book stood at 5.6 GW (or Rs. 39,700 Crore /USD 7.2 billion) as

on August 13, 2012; with new firm orders of 456 MW and frame agreements of 200 MW signed

over Q1 FY13.

III.(b) Management Comment

Tulsi Tanti, Chairman and Managing Director - Suzlon Energy, said: This has been a

disappointing first quarter. The macroeconomic environment, policy uncertainties in some

markets, along with other external factors such as the depreciating Rupee continue to impact us.

Although Suzlon met its June FCCB liability in full as per the commitments - this absorbed a

lot of management time and attention. He added further, However, our core business

fundamentals remain sound - high gross margins, strong and firm order book, and high turbine

availability - and we are embarking on a robust program, Project Transformation, to reduce

annual Operational expenses and manpower cost by 20 per cent by the end of the year. Suzlon

have also made it a priority to strengthen our balance sheet significantly by deleveraging in

India. This will be a defining year for Suzlon Group, even as our sector continues to face a

number of challenges. Kirti Vagadia, Chief Financial Officer - Suzlon Energy, said: At the start

of this fiscal I set out our key priorities as a company, and I am pleased to report solid progress

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on a number of them. We have disposed of non-critical assets, such as wind farm assets here in

India along with our manufacturing assets in China. Suzlon raised US$ 300 million in new

credit facilities and met its June FCCB liability of US$ 360 million in full,. However, first

quarter volumes were significantly constrained by a shortfall in working capital facilities.

Additionally, our profitability was impacted by an adverse market mix, a high interest burden

and notional forex losses. He added further, We are in the process of enhancing our working

capital facilities to execute our order pipeline and achieve our targeted 30 per cent growth. We

are working toward reducing our overall interest burden and are happy to report that some of our

senior secured lenders have reduced our interest rates by 2.5 per cent. He quoted further, Our

clear priorities for the fiscal are now to reduce fixed costs; drive volume execution; realize

Group synergies; improve working capital management and optimize our balance sheet”.

Analysis of financial results of Suzlon Energy on Consolidated basis and stand Alone

performance is presented below :

A. Suzlon Energy: Consolidated Results

Figures in Rs Crore

Years 1206 (3) 1106 (3) Var. (%) 1203 (12) 1103 (12) Var.

(%)Sales 4770.66 4379.71 9 21359.21 18090.23 18Operating Profit Margin on Sales (%) -3.5 11.3 8.8 5.5Operating Profit -165.86 493.78 PL 1880.47 994.14 89Other inc. 77.30 32.18 140 125.74 106.60 18Profit Before Interest Depreciation & Taxes -88.56 525.96 PL 2006.21 1100.74 82

Interest 493.69 359.99 37 1654.74 1374.78 20Profit before Depreciation &Taxes -582.25 165.97 PL 351.47 -274.04 -228Depreciation. 177.70 141.11 26 661.23 657.40 1PBT before Forex loss & External operations (EO) -759.95 24.86 PL -309.76 -931.44 -67

Forex Loss 91.53 -58.67 -256 59.27 -53.10 -212PBT after Forex loss before External Operations -851.48 83.53 PL -369.03 -878.34 -58

External Operations Expenses -44.65 0.00 LP -227.24 253.28 -190Profit before Taxes after EO -806.83 83.53 PL -141.79 -1131.62 -87Current Tax 46.77 14.04 233 330.80 185.27 79

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Profit After Tax -853.60 69.49 PL -472.59 -1316.89 -64Share P/L in associate 0.00 -12.36 -100 -33.29 -27.83 20Minority interest (MI) - Loss/(profit) 4.63 2.99 55 27.30 20.75 32Net Profit -848.97 60.12 PL -478.58 -1323.97 -64Earnings Per Share (Rs)*

Note : Negative Negative Negative Negative

* EPS is on current equity of Rs 355.47 Crore, Face value of Rs 2# EPS is not annualized due to seasonality of businessFigures in Rs Crore** Variance not calculated as there is no comparable corresponding previous year figureSource: Capitaline Corporate Database B.Suzlon Energy: Standalone Results

  Figures in Rs Crore

1206 (3) 1106 (3) Var. (%) 1203 (12) 1103 (12) Var. (%)Sales 596.91 1469.07 -59 6871.21 4366.39 57OPM (%) -43.1 18.7 12.5 6.3OP -257.47 275.22 PL 857.75 273.05 214Other inc. 88.71 82.47 8 347.06 331.67 5PBIDT -168.76 357.69 PL 1204.81 604.72 99Interest 284.36 179.94 58 884.02 658.33 34PBDT -453.12 177.75 PL 320.79 -53.61 -698Dep. 43.08 40.83 6 182.68 156.89 16PBT before Forex Loss & EO -496.20 136.92 PL 138.11 -210.50 -166Forex Loss 205.99 -0.91 PL 287.96 12.71 2166PBT before EO -702.19 137.83 PL -149.85 -223.21 -33EO Exp -5.55 0.00 LP 348.92 37.28 836PBT after EO -696.64 137.83 PL -498.77 -260.49 91Current Tax 0.00 0.00 6.61 -74.83 -109Net Profit -696.64 137.83 PL -505.38 -185.66 172Earnings Per Share (Rs)* Negative Negative Negative Negative Note : * EPS is on current equity of Rs 355.47 Crore, Face value of Rs 2# EPS is not annualized due to seasonality of business

Source: Capitaline Corporate Database

. Suzlon defaulted in repayment of amounts aggregating approximately USD 209 million (Rs

1,250.44 Crore) in respect of its unsecured FCCBs which were due in October 2012 (“October

2012 FCCBs”). This default triggered a cross default under the Company’s other existing

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unsecured FCCBs aggregating USD 90 million (Rs 539.24 Crore) and USD 175 million (Rs

1,048.51 Crore), (which otherwise were due in 2014 and 2016 respectively) (the “2014 and 2016

FCCBs”) and accordingly these triggered potential acceleration of payments, if were demanded

by a specified proportion of the 2014 and/or 2016 FCCB holders. The Trustees for the 2014 and

2016 FCCB holders have not issued any acceleration notice in respect of the 2014 and 2016

FCCBs and accordingly USD 175 million (Rs 1,048.51 Crore) has been classified as non-current

liability. Suzlon also has overdue amounts payable to Creditors and certain lenders as at March

31, 2014. On May 03, 2014, the Company entered into a standstill agreement with an adhoc

committee of FCCB holders for a cashless exchange of its existing October 2012 FCCB’s, 2014

FCCB’s and 2016 FCCB’s. The new FCCB’s are expected to have maturity period of five years

and a conversion price of Rs 15.46. Further, the new FCCB’s will be interest bearing and no

premium will be payable on redemption. However this agreement is subject to various approvals,

including approval of Reserve Bank of India. The Company is in the process of restructuring of

FCCBs. The Company is also taking various other steps to reduce costs, improve efficiencies to

make its operations profitable and to arrange sufficient funds for its operations. Pending the final

outcome of restructuring, though there exists material uncertainty these financial statements have

been prepared on the basis that the Company will continue as a going concern, and no

adjustments have been made to the carrying values or classification of assets and liabilities.

6. On March 29, 2014, the Company sold its Operation and Maintenance ("OMS") Business

Undertaking to one of its subsidiaries. As such formulating and adopting a CDR proposal

became a necessity for Suzlon for its mere survival against a background of losses and multiple

loan defaults!

(iv) Adoption of Corporate Debt Restructuring scheme (CDR )

The CDR Proposal includes a two year moratorium on principal and term-debt interest

payments; an approximately three per cent reduction in interest rates; six month moratorium on

working capital interest; conversion of approximately Rs 1,500 Cores (two year’s interest

payment during moratorium) into equity / equity linked instrument over the next two years to

bring stronger financial stability and a ten year door-to-door back-ended repayment plan.

The CDR Proposal also includes an enhancement of working capital facilities, by approximately

Rs 1,800 Crores, allowing the Company to accelerate the execution of its strong order book.

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In terms of CDR Scheme, the Promoters (on their own or together with their relatives, friends

and associates) are required to bring in equity to the extent of Rs 250 Crores into the Company in

stipulated time frame, of which Rs 125 Crores has already been infused.

During the financial year ended March 31, 2013, the Company along with its 7 identified

domestic subsidiaries viz : Suzlon Structures Limited (‘SSL’), Suzlon Power Infrastructure

Limited (‘SPIL’), Suzlon Generators Limited (‘SGL’), Suzlon Gujarat Wind Park Limited

(‘SGWPL’), SE Electricals Limited (‘SEEL’), Suzlon Wind International Limited (‘SWIL’) and

SE Blades Limited (‘SEBL’) hereinafter collectively referred to as the ‘Borrowers’ and

individually as the ‘Borrower’, had availed various financial facilities from

the secured lenders under the Corporate Debt Restructuring Proposal, which was approved by the

CDR Empowered Group (‘CDREG’). The Master Restructuring Agreement (‘MRA’) between

the Borrowers and the CDR Lenders has been executed, by virtue of which the restructured

facilities are governed by the provisions specified in the MRA having cut off date of October 01,

2012.

(v) The key features of CDR Scheme are as follows :

a. Repayment of Restructured Term Loans (‘RTL’) after moratorium of 2 years from cut off date

in 32 structured quarterly installments commencing from December 2014 to September 2022.

b. Conversion of various irregular/outstanding/devolved financial facilities into Working Capital

Term Loan (‘WCTL’).Repayment of WCTL after moratorium of 2 years from cut off date in 32

structured quarterly installments commencing from December 2014 to September 2022, subject

to mandatory prepayment obligation on realization of proceeds from certain asset sale and capital

infusion.

c. Restructuring of existing fund based and non fund based financial facilities, subject to renewal

and reassessment every year.

d. Interest accrued but not paid on certain financial facilities till cut off date shall be converted

into Funded Interest Term Loan

(‘FITL’). The interest payable on RTL and WCTL during moratorium period of 2 years from cut

off date shall also be converted

to FITL. FITL shall be considered as convertible facilities which shall be converted into equity

shares or compulsorily convertible debentures (CCDs) in accordance with MRA.

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e. The rate of interest on RTL, WCTL, FITL and fund based working capital facilities shall be

11% with reset option in accordance with MRA.

f. Waiver of existing events of defaults, penal interest and charges etc in accordance with MRA.

g. Right of Recompense to CDR Lenders for the relief and sacrifice extended, subject to

provisions of CDR Guidelines and MRA.

h. The Company to issue equity shares in lieu of sacrifice of the CDR Lenders for the first three

years from cut off date at the price agreed in compliance with Securities and Exchange Board of

India, if demanded by CDR Lenders.

i. Contribution of Rs 250.00 Crore in the Company by promoters, their friends, relatives and

business associates in lieu of bank sacrifice in the form of equity shares / CCDs including

conversion of existing promoter’s loan of Rs 145.00 Crore into equity shares / CCDs at the price

agreed in compliance with Securities and Exchange Board of India.

In case of financial facilities availed from the non-CDR Lenders, the terms and conditions shall

continue to be governed by the provisions of the existing financing documents.

Expenditure on restructuring and refinancing of earlier financial facilities aggregating Rs 70.86

Crore has been charged off and disclosed under exceptional items during the financial year ended

March 31, 2013. During the year ended March 31, 2014, pursuant to approval of CDR EG, the

borrowers approached CDR and non-CDR lenders seeking financial assistance to bridge the

shortfall in working capital facilities assessed during preparation of CDR Proposal, by

offering priority repayment against the specific receivables being financed by them along with

sharing of securities under CDR

Package, and accordingly the Company has availed loans against project specific receivables.

During the year ended March 31, 2014, the Company agreed a restructuring proposal with Power

Finance Corporation (‘PFC’) which is a non- CDR lender, subject to CDR EG approval. As per

the restructuring, the Company converted certain portion of interest accrued to FITL - I and FITL

(vi). Repayment of outstanding term loan and FITL - I to PFC shall be in accordance with

the CDR proposal and MRA. Repayment of FITL – II shall be made in 12 quarterly installments

from December 2022 to September 2025.

As per the MRA executed by the Borrowers and the CDR lenders during the financial year

ended March 31, 2013 as well as the provisions of the Master Circular on Corporate Debt

Restructuring issued by the Reserve Bank of India, give a right to the CDR Lenders to get a

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recompense of their waivers and sacrifices made as part of the CDR Proposal. The recompense

payable by the borrowers is contingent on various factors including improved performance of the

borrowers and many other conditions, the outcome of which currently is materially uncertain and

hence the proportionate amount payable as recompense has been treated as a contingent liability.

Further, as mentioned in Note 3 to the financial statement, the Company has an obligation to

issue equity shares in lieu of the sacrifice for the first 3 years from cut-off date, if demanded by

lenders. In case of lenders who have exercised this right the value of equity shares issued has

been shown as equity share capital/share application money received, and this cost is amortized

over the period of sacrifice. In case of lenders who have not exercised this right, the amount has

been shown as contingent liability. The aggregate outstanding sacrifice made by CDR Lenders as

per the MRA is approximately Rs 281.93 Crore (Rs 103.06 Crore) for the Company and Rs

365.33 Crore (Rs 129.32 Crore) for the borrowers. Suzlon had sought approval of shareholders

by way of postal ballot vide notice dated March 8, 2013, the results of which have been declared

on April 12, 2013, inter alia for following preferential allotments:

• Issue of equity shares and / or compulsorily convertible debentures on preferential basis on

conversion of the funded interest term loan to the CDR Lenders;

• issue of equity shares and / or compulsorily convertible debentures on preferential basis on

conversion of the funded interest term loan to the non-CDR Lenders as on the date of the postal

ballot notice;

• Issue of equity shares on preferential basis for the sacrifice by IDBI Bank Limited,

• Issue of equity shares and / or compulsorily convertible debentures, on preferential basis, to the

Promoters;

• Issue of equity shares and / or compulsorily convertible debentures, on preferential basis, to

Samimeru Wind farms Private Limited; and

• issue of equity shares on preferential basis to Kalthia Investment Private Limited, Mr. Kalpesh

R.Kalthia, Mrs. Anu Kalthia and Mrs. Ritu Kalthia.

Pursuant to the approval of its Board of Directors, Corporate Debt Restructuring Empowered

Group of commercial banks and Reserve Bank of India and pursuant to the approval of the

holders of each of its outstanding FCCB series, the Company successfully restructured each of

its existing FCCB series, wherein, 100% of 0% October 2012 Bonds, the 7.5% New October

2012 Bonds and 0% July 2014 Bonds got fully substituted by the new FCCBs on July 15, 2014

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and thus ceased to exist. In respect of 5% April 2016 Bonds, out of USD 175 million

approximately USD 28.8 million in principal value remain outstanding; the remaining holders of

the 5% April 2016 series opted to substitute their existing bonds with the new foreign currency

convertible bonds. The entire outstanding coupon obligation on the 5% April 2016 series got

substituted by new bonds. Suzlon is also taking various other steps to reduce costs, improve

efficiencies to make its operations profitable and to arrange sufficient funds for its operations and

accordingly the financial statements have been prepared on the basis that the Company is a going

concern.

The recompense amount payable in lieu of sacrifice is contingent on various factors including

improved performance of the borrowers and many other conditions, the outcome of which

currently is materially uncertain. Accordingly, the Suzlon has shown the proportionate amount

payable towards recompense as contingent liability.

(vii) Allotment of shares

The first phase of allotment of 30.24 Crore shares at an issue price of Rs 18.51 per share to CDR

lenders has been completed. The new shares will be subject to a lock-in period of one year from

the date of allotment. In October 2012, the company had announced plans to enter into debt

restructuring. The CDR restructuring package was formally approved in January 2013 by the

company’s domestic lenders, which is a consortium of 19 banks led by State Bank of India.

(viii) Refreshing outlook for improved performance for Suzlon:

Suzlon is a pioneer in providing end–to–end wind power solutions for increasing demand for

wind energy over the world. It has state of the art R & D centers & training campuses in India. It

believes in combining global experience with local expertise to maximize techno–economic

value for their clients. It offers turbines in customized versions for installation in accordance to

climate ranging from hot, dry deserts to humid coasts, to near–freezing plains. Suzlon’s current

product profile includes wind turbine generators in capacities from 350 kW to 2.1 MW, the

largest example of a wind turbine manufactured and exported from Asia. The two product line–

up of Suzlon’s are the S52 – 600 kW and S82 – 1.50 MW wind turbines. The S52–600 kW

turbine is specially designed to deliver high–performance in the low–to–medium wind regime

prevalent across most of India catering to smaller investors, businesses and industries at an

affordable price. In  the series S82 – 1.5 MW wind turbine has been designed that incorporates

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advanced features like Micro Pitch technology, high performance gearbox, advanced yaw

system, & many more features that delivers high performance with high reliability

 Suzlon has been consistent in delivering high quality product at an affordable price to their

customers. Its order book reflect strong position in market, it stands at around $4,335 million.

Its domestic order book position consist capacity of 441 MW & international orders for 3,726

MW. In India, Suzlon caters to leading corporate houses like the MSPL, Bajaj Auto, Tata Group

and Reliance, among others. Suzlon has signed contracts with top wind energy companies

around the world. Majority of the orders have been signed with top wind energy companies in

the United States.

The Government of India’s clear thrust on energy security and renewable energy is epitomized

in the recently presented Union Budget that outlined the measures to boost the wind energy

sector. Accelerated Depreciation (AD) of 80% which was discontinued in 2012 has been

reinstated this year to stimulate investments and provide further momentum for the Wind energy

sector. AD also offers additional return for those Indian companies, who would like to set up

captive power plants and hedge their power cost for25 years. Furthermore, the Government has

now announced that investment in wind energy as one of the qualified CSR activities under

section 135 of the Companies Act, 2013. Income tax holiday under section 80IA has been

extended till 2017. With these favourable measures of the Government, medium term outlook for

the wind sector in India has improved significantly .The priority for FY15 will be to further

strengthen our order book by unlocking and expanding our share in the growing offshore and

emerging markets. It is expected that Suzlon would be able to enhance its global competitiveness

by leveraging the technology edge and investing in development of new products with high

yields. It continues to maintain its technology leadership by introducing a range of new product

variants in the3MW&6MWseries. Suzlon Group is in the process of developing and

commercializing of the S97-120m (hybrid tower), S111, 3M-122m and6.2M-152m. These

products will change the business dynamics providing a competitive edge for the Group. The

Group stands committed to bring down the cost of renewable energy and thereby maximize

return on investments for its vendors, customers and other stakeholders.

Emerging Perspectives and lessons of the case:

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The operational results and financial performance as portrayed above from the case

study of Suzlon Energy gives vital lessons to Corporate executives /finance and

management professionals, Banks /financial institutions, RBI and the Government

Corporations are known to give a larger concern with their Earnings per

Share (EPS) instead of cash flow adequacy and improvements in operations.

This is necessitated by the focus on ensuring a higher return to the

promoters, institutional investors /banks and shareholders. During the Pre

crisis period, expansion of activities was largely funded by debts obtained

from the banking sector and international markets.

Bank loans - have always been the main pool of capital - to fund the

aggressive growth of corporates during the boom period for all needs

whether fixed capital or working capital , expansion/globalization needs

Certainly Corporates like Suzlon have over-geared themselves to fund the

aggressive growth with low focus on the need to improve demand and

market share, operations and cost reduction measures. Suzlon had also to

face the consequences of the regional financial/economic crisis which

affected the corporates to meet its debt obligations both domestic banks and

international markets

All creditors and are not adequately protected by the BIFR / SICA/ CDR,

while Companies can easily seek court protection for survival of the

enterprises The situation and circumstances as described above by Suzlon

case study necessitate formulation and adoption of a recovery path based

on improvement in operations, cost reduction measures and by

profit/reserves and infusion of funds by the promoters.

As an indication of the heavy reliance on the banking sector: Bank loans –for

both fixed capital and working capital needs easily constitute 70% of

corporate sector liabilities and the problem comes to light only when

liquidity is squeezed and interest rate rises

The distress on the financial system would have been less severe had the

credit risk management system of the banks been more effective.

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Elements of double leveraging, collateral-based lending, emphasis on profits

rather than cash flow management, allowing mis-matching of funds - are

equally the conscious decisions of the lenders as it is of corporate borrowers

like Suzlon. RBI as a bankers bank has realized the need and initiated

measures to tighten the credit appraisal system and implementation by the

banks.

Funding mismatch for privatization and large scale infrastructure projects

Can be attributed to the emphasis by the Government to accelerate growth

in the economy through the efforts of the corporate sector and low

performance of public sector undertakings /utilities

Questions:

1. Why Suzlon incurred losses during the years 2011-12 to 2013-14? Give the

various reasons and analysis of its performance by operations & financial

results.

2. What is Corporate Debt Restructuring (CDR) proposal? How CDR is

administered to a company with losses as per the revival scheme?

3. Describe the key features of the CDR proposal of Suzlon and its details of the

measures adopted to overcome the crisis .

4. What are the lessons of the case to the companies , banks/institutional

lenders ,the RBI as a central bank for the economy and the Government

Technical Notes : Answers to the question.1 are discussed in Part III along with analysis

of operational results and financial results .

Answers to the question .2 are presented in Part II.

Answers to question .3 can be observed from Part .III (iv) to (viii)

Answers to question .4 can be obtained from Emerging Perspectives /lessons of the Case

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Notes for References :.

1. The case study on Suzlon Energy Ltd has been made in the following category: Corporate analysis/decision//ex post facto case/critical incidents pertaining to the decline in its operational performance and financial results.2. Discussions relating to the Company profile, products and activities /operations are contained in published sources /annual reports and accounts of Suzlon Energy ltd. for the 6 years from 2008-09 to 2013-14. As such the case is written entirely from publicly available secondary sources, with no direct communication with the organization, the authors are not required to obtain a release for publication. 3. C.S.Balasubramaniam (2013): CORPORATE DEBT RESTRUCTURING: CONCEPT,ASSESSMENT AND EMERGING ISSUES, Abhinav Journal of Research in Commerce & Management , VOLUME NO.2, ISSUE NO.1 ( ISSN 2277-1166) 4.BS Reporter (2012): Loan recast: Banking System credibility at stake, RBI .BusinessStandard, September 14, 2012.5. K.C.Chakraborty: Corporate Debt Restructuring: The Issues and Way forward, RBIMonthly Bulletin, September 2012.6. Edward M.Kerschener (2009): Thematic Investing – Corporate Restructuring Lessons inCorporate Finance, 2009.7. Dr.A.S.Hosmani & M.R.Jagadish Hudagi (2011): Unearthing the epidemic of Non –Performing Assets: A Study with reference to Public Sector Banks in India. , Zenith: International Journal of Multidisciplinary Research, December 2011.8. Madan Sabnavis (2012): Are CDRs=NPAs, Financial Express, September 4, 2012.9. B.Mahapatra (2012) :Highlights and Rationale of the recommendations of the Working Groupto review the existing Prudential Guidelines on Restructuring of Advances ,RBI MonthlyBulletin , October 2012.10. Union Budget documents for the years 2010 -11 to 2013-14, Government of India

 

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