India's Suzlon Energy Is Buffeted by New Headwinds

Debt-Laden Turbine Maker Grapples With Weak Sales Growth, More Production Problems as It Tries to Raise Cash

By TOM WRIGHT

India's Suzlon Energy Ltd., one of the world's largest producers of wind turbines, faces new blade-production problems, according to people familiar with the matter.
Associated Press
Suzlon is contending with troubles on a Chinese project. Above, Suzlon turbines lined a Minnesota road in May.
The new concerns come as Suzlon is trying to raise funds, including through selling a stake to private-equity firms. The company may be at risk of breaking debt covenants and has to pay €205 million, or about $275 million, over the next six weeks to complete an acquisition.
The latest issues concern blades for a project in China's Shandong province. Early last year, Suzlon won a contract with Germany's REpower Systems AG to produce blades for 75 turbines for the China project and an option on 75 more. But REpower rejected Suzlon's prototype for the initial blades for not meeting REpower's quality standards and obtained them from other suppliers, according to people familiar with the matter.
Suzlon owns 74% of REpower but must manage the company at arm's length because of German corporate law protecting minority shareholders. REpower said that German law regarding related-party transactions requires that Suzlon pay REpower for any losses stemming from business dealings between the two companies. REpower lost at least €6 million on the first 75 turbines by having to ship stand-in blades to China from Europe, one of the people familiar with the matter said.
"New blades for any new customer take time," said Suzlon Chief Operating Officer Sumant Sinha. "Our products are good and reliable." He said any penalties relating to the REpower blade issue wouldn't be material to Suzlon.
Suzlon said Wednesday that the China issues related to late delivery, not technical capabilities. The company said it is "working vigorously" on blade-prototype testing for the remainder of the China project, after which it hopes to move to full-scale production.
The problems come at a difficult time for the Pune-based company. Suzlon already is spending $100 million to fix blade cracks on its turbines in the U.S., Europe and Brazil. Suzlon's export-order backlog was down 38% at the end of last year from a year earlier.
Suzlon forecasts that net sales will rise 10% to 15% for the fiscal year that ends next March. That's down from about 70% growth, to $2.7 billion, for fiscal 2008. Suzlon said new orders from customers in the U.S., China and Australia indicate confidence in the company.
Suzlon remains saddled with debt from a rapid expansion begun two years ago. Suzlon founder Tulsi Tanti sought to build a global wind-turbine manufacturer that could take advantage of India's low-cost labor. A major plank of that expansion was taking on debt to finance the 2007 deal to acquire REpower for $1.7 billion and to build new factories in the U.S., China and India.
Mr. Tanti, who is Suzlon's chairman and chief executive, wasn't available for comment.
New financing has been hard to come by, and as a result, Suzlon may be in danger of breaching its debt covenants, according to analysts and one of the people familiar with the matter.
Credit Rating Information Services of India estimated that the $2.2 billion of net debt Suzlon reported for the end of last year was 1.5 times its equity at that time. But Suzlon's debt covenants with its lenders say that so-called gearing ratio can be no larger than 1.0.
Suzlon could have breached that requirement at the end of last month, when the company was required to establish that it is meeting various debt ratios. Mr. Sinha said data on whether the company met its covenants at the end of March won't be ready until late next month.
If Suzlon breaches its covenants, it could sell major assets to raise cash to pay back the banks, analysts said. One possibility is off-loading a stake in its Hansen Transmissions International NV unit, a Belgian industrial-gearbox maker, analysts said.
Even if Suzlon breached its covenants, its lenders might not exercise their rights to seek payment. Suzlon's chief lenders, ABN Amro and Deutsche Bank AG, declined to comment.
Other recent efforts to raise capital haven't borne fruit. Suzlon shelved a $360 million rights issue late last year because its stock price had fallen sharply. Its shares Wednesday were off 79% from a 52-week high reached last May, putting the company's market value at $2.1 billion. Suzlon also has been attempting to sell a stake to private-equity firms.
Meanwhile, Suzlon has to pay €30 million this month and €175 million in May to complete the purchase of a further 17% stake in REpower from Martifer SGPS SA of Portugal.
Suzlon said it is "exploring multiple financing options" and trying to increase the efficiency of its supply network, which could reduce its capital requirements.
Suzlon transferred money from its Spanish unit despite owing money to creditors in Spain, according to a Feb. 11 letter to the head of Suzlon's European arm from Felipe Garcia-Mina, a director of Suzlon's Spanish unit.
In the letter, which was reviewed by The Wall Street Journal, Mr. Garcia-Mina also said Suzlon's actions potentially left him personally liable to creditors under European Union law.
He wrote that he understood Suzlon's cash-flow situation and was prepared to assume some risk if he could control it, "but I do not believe that Suzlon is asking the managers to assume [an] unlimited risk and without any control."
Mr. Garcia-Mina referred calls to Suzlon. Mr. Sinha, Suzlon's operating chief, said the letter referred to "normal correspondence between two of our subsidiaries" that has been resolved.
Write to Tom Wright at tom.wright@wsj.com