Vestas bond debut could boost position

DENMARK: Danish turbine manufacturer Vestas Wind Systems tapped the debt capital market for the first time in March with a EUR600 million corporate bond issue, raising funds analysts say will put the company in a better position should the operating environment worsen.

The Eurobond transaction, the first by a pure-play wind power systems supplier, was more than three times oversubscribed. Vestas said it would use the funds for general financing.

Lars Villadsen, senior specialist with Vestas investor relations, explains that the firm chose to issue bonds because interest rates are fixed for five years and pricing offered by the corporate bond market is attractive.

Vestas, which is still the world's largest turbine manufacturer despite losing market share to competitors, is not in pressing need of cash. Christian Nagstrup, an analyst with Denmark's Jyske Bank, said that the company had cash at the end of 2009, but that the concern is more about the need for net working capital in the future.

"If the current situation of only a limited number of orders persists, then it will need to push up working capital," he says.

Vestas is in good company - many other corporate debt issuers are also seeking to gain breathing room and financial flexibility. "Because of the liquidity panic that many companies suffered at the end of 2008 and in the first half of 2009, companies don't want to seem to run out of options," notes Patrick McCullagh, head of European credit research at Schroders. Corporate bonds are generally in vogue and many banks are nudging clients towards the debt market rather than lending money directly.

Vestas does not have a credit rating, which is a requirement for index inclusion. This may have made the issue less attractive for some fixed-income investors who track market indices.


In February, Vestas indicated that it might issue a bond, as it took a more cautious view of prospects for 2010 prospects. The company then downgraded its 2010 earnings before interest and taxes (EBIT) margin forecast to 10-11% from a previous 10-12%. Vestas forecast revenues of EUR7 billion rather than the EUR7-8 billion previously indicated.

The firm explained that it is unlikely to hit the EUR8 billion threshold as much of its order book is not due to be developed until later in the year. It predicts that profit improvements will slow due to having excess turbine capacity and the fact that most revenues and profits will be earned in the second half of 2010.

"The wind business is getting big enough to do things like this," notes McCullagh. "Fixed-income investors generally like liquidity, so the end deal is that we absolutely do require transactions involving bigger companies."

McCullagh says other wind bonds are generally considered niche investments. "There is a certain value in issues (like that of Vestas) because renewable energy is underrepresented and it provides a bit of diversification."

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