Suzlon Energy Ltd was set to default on redemption of more than $200 million in overseas convertible bonds due on Thursday after bondholders rejected a four-month extension, sending its shares down as much as 5 percent.
The world's fifth-largest maker of wind turbines was one of numerous Indian companies that rushed to tap the offshore convertible bonds market before the global financial crisis, often to finance overseas acquisitions.
Since then, many of the nearly two dozen Indian companies with nearly $6 billion in foreign currency convertible bonds maturing this year have struggled to meet their debt obligations due to a sharp plunge in share value, feeble earnings growth and a weaker rupee.
A total of $1.3 billion of convertible bonds are expected to come up for redemption in the October-December quarter, brokerage Kotak Securities said in a report last month.
"I regret to announce today that the bondholders' meetings did not achieve the consensus we were hoping for and the four-month extension sought by us has not been granted," Kirti Vagadia, chief financial officer of Suzlon, said in a statement.
"We expect that an acceptable solution for all stakeholders will be arrived at the earliest possible."
Suzlon would not be the first Indian issuer to default on its overseas convertible bonds. In 2009, generic pharmaceuticals maker Wockhardt
"It's not good," Tobias Bettkober, a Zurich-based manager of Indian convertible bonds with Holinger Asset Management, said of Suzlon's default.
"It's showing lack of execution quality. It's problematic of course for trust and sentiment for investors in India."
Suzlon has been under pressure in recent years from a slowdown in global turbine sales and its debt, and has lost money for the past three years. While it has an order book of $7.2 billion, tight working capital squeezed its operations in the June quarter.
At the group level, Suzlon had net debt of 130.17 billion rupees at the end of June, rising from 105.44 billion rupees in the year ago period, while its cash totalled 13.72 billion rupees at end-June.
Suzlon has two other dollar bonds worth a combined $265 million maturing in 2014 and 2016, Thomson Reuters data show.
Suzlon said last month it would seek approval from bondholders on October 10 to extend the maturity of two tranches of convertible bonds due on October 11 by four months to February 11. That would have given it time to sell more assets and attempt to collect receivables.
Suzlon has said it aims to sell between $100 million and $200 million in assets this fiscal year; it has sold $40 million worth, with another $60 million worth in the pipeline.
It recently filed a lawsuit in the United States to collect $208 million owed to it in early February 2013 by a unit of Edison International, which has argued it does not need to pay due to what it says are defects in equipment bought from Suzlon. Suzlon has said it "categorically" rejects that.
The larger of Suzlon's two bond issues due on Thursday has a conversion price of 97.26 rupees per share, while the other is convertible to Suzlon shares at 76.68 rupees. Shares in Suzlon dropped as much as 5.1 percent on Thursday to 15.70 rupees.
The stock has plunged about 83 percent in the last three years, wiping off $2.5 billion from its market value.
Fitch Ratings predicted in a report in February that about half of the 55 Indian companies with maturing foreign currency convertible bonds in 2012 were at risk of some type of restructuring or default.
The combination of higher domestic borrowing costs and risk aversion among global banks has made it tougher for the smaller and mid-sized Indian firms to raise funds to pay bondholders.
On Thursday, State Bank of India, which has about $659 million of exposure to Suzlon, said banks would look at ways for the company to restructure its debt, which could involve Suzlon's Germany-based REpower subsidiary.
Santosh Nayar, deputy managing director at SBI, said Suzlon's failure to win bondholder approval for the extension was "highly unexpected".
In July, Suzlon redeemed $360 million of overseas convertible bonds after bondholders agreed to a 45-day deadline extension, allowing it to raise bank loans for the repayment.
Indian banks, especially state lenders, tend to be willing to help major corporate clients through tough times, as has been seen in the drawn-out case of embattled Kingfisher Airlines, and liquidations are extremely rare.
"It would be actually a helpful reference if you for once had an ordinary restructuring or wind-down of a company to the benefit of the bondholders," said Holinger's Bettkober.
"That dodginess that you have around conversion to equities, around restructuring, unwinding companies -- that dodginess is the prime cause of mistrust in India. And that's expensive in terms risk premium that is then demanded."