Credit crisis puts rights issue on hold -- Suzlon and Repower

India's Suzlon has abandoned plans to raise INR 18 billion ($390 million) via a rights issue and "decided to suspend the process of negotiation" to enter a domination and profit transfer agreement with Repower, in which it already holds a 66% stake. Suzlon had planned to use the money raised from the rights issue to buy the 22.48% share in Repower currently held by Portugal's Martifer (Windpower Monthly, October 2008).

The Indian firm cites the problems of the "current capital market environment" as the main factor behind its decisions, adding that the domination agreement deferment was a joint decision with Repower.

Pressure from banks

In a statement issued on the same day, Repower says the decision has been forced by a syndicate of banks with which it is in advanced negotiations regarding the financing of the company's further growth. "The syndicate of banks makes it a condition precedent for the execution of the financing agreements that the parties refrain from entering into a domination and profit transfer agreement," it says. The two firms have therefore "decided they will no longer pursue the negotiations...if this growth financing is executed."

The new financing agreement being discussed includes a cash credit facility and guarantees, which could almost double Repower's credit line in accordance with planned sales growth at the company. Its current financing agreements total around EUR 365 million of which EUR 45 million is cash. The rest takes the form of bank guarantees, needed in particular to provide customers with security that their deposits for turbines ordered will be refunded if turbine delivery does not take place as planned.

Meanwhile, Repower reports bullish preliminary results for the six months to the end of September. Total operating revenue almost doubled to EUR 531.1 million from EUR 268.7 million in the same period in 2007, while sales grew 92.5% year-on-year from EUR 275.3 million to EUR 529.9 million. Earnings before interest and tax soared 198.7% to EUR 22.7 million from EUR 7.6 million in the first half of 2007. Its order book stands at over EUR 1.5 billion of contractually assured order volume, it adds.

For Suzlon's part, it points out that "in the current global financial meltdown, it is important to note that the fundamentals of the wind industry remain largely unchanged and hence the company's business plans remain on track." Had the share rights issue proceeded as planned, however, Suzlon may have raised as little as 25% of the total money it was targeting. When Suzlon first announced the plan in early September, its shares were worth about INR 200 (EUR 3.1) each but by the end of October their value had fallen around 77% to INR 46 (EUR 0.7).

The delay may make financial sense for now, but Suzlon has just another six months, until May 25, to complete the EUR 270 million acquisition of Martifer's Repower stake. At that time, it could be forced to use the bank guarantee it provided the Portuguese firm with under the original 2007 share sale agreement to pay for the deal.