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SunEdison ‘On Life Support’ After TerraForm Yieldco Bubble Blast

Bankruptcy clouds shadow SunEdison ( SUNE ) this week, ahead of a Wednesday deadline to file its annual 10-K or, say analysts, default on $725 million in second-lien loans — an inferno, at least two analyst say, that ties back to its yieldcos TerraForm Power ( TERP ) and TerraForm Global ( GLBL ). Late Tuesday, reports surfaced that the U.S. Securities and Exchange Commission might be probing SunEdison’s liquidity stance. The Wall Street Journal reported that SEC investigators are examining how much cash SunEd had on hand last year. In early trading on the stock market today , SunEdison stock plunged more than 40% on the investigation rumor, dipping below 1 to an all-time low. “I’d say (SunEdison is) kind of on life support as we speak,” S&P Global Market Intelligence analyst Angelo Zino told IBD on Monday. “We have absolutely no visibility into the financial outlook of the company. It’s obviously very worrisome.” SunEd’s Lacking Financials SunEdison last held an earnings call in November, about two weeks before it fired Carlos Domenech, SunEd executive vice president and CEO of both TerraForms. According to TerraForm Power’s proxy statement, Domenech first initiated communications with Vivint Solar ( VSLR ). On July 20, SunEdison announced its plan to acquire residential solar installer Vivint. The deal briefly got a warm embrace on Wall Street, but shares of SunEdison and Vivint Solar have plummeted a respective 96% and 83% since then. In December, SunEd cut its bid on Vivint to reflect the drop in stock price, and this month Vivint scrapped its sale to SunEdison, citing financial concerns about the acquirer. A major TerraForm Power investor had been angling to block the deal as well. The transaction would have dropped Vivint Solar’s 523-megawatt rooftop assets down to TerraForm Power. Since then, SunEdison delayed its annual 10-K financial statement on Feb. 29 and March 16, citing an ongoing investigation into its liquidity stance . The investigation arose from allegations by former and current executives of financial misconduct. Yield company TerraForm Power blamed SunEd for its own late 10-K. TerraForm Power is facing Nasdaq delisting as well as a potential slew of investor class action lawsuits related to the insider trading and fraud portions of the Securities and Exchange Act of 1934. TerraForm Power stock was down nearly 8% early Tuesday, below 8. Zino maintains his hold rating on SunEdison stock, but over the past week investment banks Cowen and Stifel Nicolaus have dropped their coverage on SunEdison stock. ‘Overpaying For Assets’ Nine months ago, SunEdison was a different company, Zino says. In June, SunEdison’s assets were valuable, the company had ready access to the debt financing and equity markets, and could tap its healthy TerraForm yieldcos. A yieldco is created to house assets, generate on-tap cash flow and yield tax-free dividends. TerraForm Power filed its IPO in June 2014. NRG Energy ( NRG ) followed in May 2015 with a superior strategy, T-Rex Group CEO Benjamin Cohen told IBD. T-Rex Group is an analytics-based advisory group for renewable stocks. NRG Yield ( NYLD ) held 71% non-renewable assets in conjunction with 29% renewable assets — balancing older profitable assets with newer and more quickly-depreciating renewable assets. By appearing less profitable overall, the yieldco can pay less in taxes, Cohen explained. It’s a completely legal strategy — and investors ate it up. Soon, the yieldcos were producing more cash than the parent company could invest. “So they had to invest in unsecured assets,” namely the pre-development stages of projects already dropped into the yieldcos. “They were overpaying for assets . . . and that risk drove up the price of the assets.” The bubble burst. Days after announcing its plan to acquire Vivint Solar, SunEdison’s TerraForm Global filed its IPO and launched on Wall Street at 12.44, 17% below its 15 IPO price. Shares were down 20% early Tuesday, below 2. ‘Public Poster Child’ SunEdison may be the “public poster child” for the yieldco bubble burst, but SunEd’s downfall isn’t indicative of the broader solar market and asset class, Cohen says. “This is the failure of a capital market vehicle, as opposed to the failure of an asset class or the failure of one particular company,” he said. But, he acknowledged, SunEd was slugged particularly hard in the yieldco blast and investors are leery of ongoing financial storms. “Equity investors are discounting the value of SunEdison because management hasn’t proved its ability to execute on its strategy,” he said. “It seems overdone.” NRG Yield stock is down more than 50% since its peak near 28 last June. The First Solar ( FSLR )– SunPower ( SPWR ) jointly-owned yieldco, 8point3 Energy Partners ( CAFD ), went public last June at 21 and is trading below 14, down 4.5% early Tuesday. July 20 proved to be SunEdison stock’s recent high point, at 33.45. Shares have traded around 1 since February. SunEdison was targeting aggressive growth via M&A and aiming to use yieldcos TerraForm Power and TerraForm Global to help pay for its investments, Zino says. Debt financing was available but more difficult, he says, considering SunEd’s heavily-leveraged balance sheet. ‘SunEdison Didn’t Have A Fallback’ Investors worried that SunEdison’s Vivint Solar acquisition was too much, too fast. Then, TerraForm Global opened far below its IPO price. “The fact SunEdison didn’t have a fallback, the fact they were getting too aggressive with these M&A deals was part of the reason we saw the investment community sell off on these yieldco vehicles,” Zino said. He added: “Once they weren’t able to tap the yieldcos anymore, that’s what really put SunEdison in the situation it’s in today.” Now, SunEdison is struggling to shop its assets around to third-party developers. In June, SunEd’s yieldcos would have bought those assets. Not now. And lacking newer financial statements, no bank will touch SunEd, Zino said. “Until they are able to get a resolution to the 10-K filing, we wouldn’t expect to see anything come out of the debt market, and it becomes problematic for the third-party market as well,” he said. “It becomes difficult for utilities to invest in SunEdison if they have no idea of the type of financial situation SunEdison is in.” And SunEd certainly can’t tap the equity market. Said Zino, “a precipitous decline in the yieldco prices had a direct impact on SunEdison stock and, as a result, we saw billions and billions (of dollars) in equity value wiped out from the yieldcos and SunEdison together.”

Could Blistered SunEdison Yieldco TerraForm Power Face Delisting?

SunEdison ( SUNE ) yield company TerraForm Power ( TERP ) slipped from Nasdaq compliance Wednesday, when SunEd’s constrained finances forced the duo to miss a March 15 deadline to submit their already delayed 10-K year-end financial statement with the Securities and Exchange Commission. In midday trading on the stock market today , SunEdison stock was down 6% and TerraForm Power stock down 5%. Shares were down a respective 59% and 16% for the year as of Tuesday’s close. TerraForm Power now has until May 16 to either submit the 10-K or a plan to regain compliance, and until Sept. 12 to become compliant or face delisting. The SunEd yieldco blamed its parent for the holdup. “Due to our management services arrangement with SunEdison . . . our financial reporting and control processes rely to a significant extent on SunEdison systems and personnel,” TerraForm Power said in a press release. If there are inefficiencies in SunEdison’s reporting system “it is necessary for us to assess whether those deficiencies could affect our financial reporting,” TerraForm Power wrote. On Feb. 29, SunEdison delayed its 10-K as it finalizes an audit into its liquidity standing. Late last year, former SunEdison executives alleged the firm lied about its liquidity stance. SunEd shook up its executive staff in November 2015, terminating former Executive Vice President Carlos Domenech. At the time, Domenech was also CEO for TerraForm Power and another SunEd yieldco, TerraForm Global ( GLBL ). SunEdison Chief Financial Officer Brian Wuebbels was immediately tapped to head up the yieldcos. But Wuebbels recently opted to leave his SunEd role to focus entirely on the TerraForm pair. Ilan Daskal will succeed Wuebbels on April 4, SunEdison said. It’s only the most recent in a series of SunEdison shake-ups. Last week, residential installer Vivint Solar ( VSLR ) backed out of a deal to be acquired by SunEdison, saying that, despite cutting its bid in December, SunEd still couldn’t afford to buy it. This month, rumors rumbled that banks financing the M&A had pulled their funding after SunEdison first delayed its 10-K. On Wednesday, SunEdison blamed the twice-delayed 10-K on “material weaknesses in its internal controls over financial reporting,” saying its newly implemented IT systems are deficient. But no material mistakes have been found in the audit thus far, SunEd said.

Vivint Solar Junks Sale To SunEdison Amid Liquidity Questions

Vivint Solar ( VSLR ) junked its sale to SunEdison ( SUNE ) early Tuesday, only four days after SunEd settled with Latin America Power shareholders for $28.5 million, having terminated the acquisition of that company in October. SunEd shareholders had been leery of the deal, and SunEdison stock rocketed 10% as of early afternoon trading on the stock market today , though it was still holding just barely above 2. The stock is nearly 95% off its 2015 high of 33.45, achieved July 20 — the day the company announced its bid to acquire installer Vivint Solar. Under that agreement, SunEdison had until Feb. 26 to close the deal, and the company had ignored a pair of Vivint Solar notices stating as much, according to an 8-K filed by Vivint Solar early Tuesday. The deal would have been vacated March 18. Legal Overhang Preferred? SunEdison’s financials are seemingly too constrained to close the deal, Vivint Solar wrote. Last week, SunEdison delayed its 10-K filing , citing an ongoing investigation into its liquidity, and suspended a dividend program. Also last week, rumors surfaced that banks backing the Vivint Solar acquisition might pull their funding amid SunEdison’s tenuous financial position. SunEdison representatives declined to comment on Monday and didn’t immediately return an email Tuesday. In its filing, Vivint Solar said, “SunEdison’s representatives subsequently have informed the company that SunEdison is unable to the cause the closing to occur in the foreseeable future.” The company plans to seek all “legal remedies available to it in respect of such willful breach.” The legal overhang is preferable to acquiring Vivint Solar, S&P Global Market Intelligence analyst Angelo Zino told IBD on Monday, before the deal was terminated. Under the original deal, SunEdison is required to pay Vivint Solar a $34 million breakup fee. “I think investors would rather see the deal not close and handle an undisclosed legal settlement fee at some point in the future,” Zino said. But he said it doesn’t behoove Vivint Solar to force SunEdison into a bankruptcy. Hyper-Growth Plan Backfired Like SunEdison shares, Vivint Solar stock has plunged since July 20. Shares jumped 45% that day, but they then fell more than 65% through Monday’s close. Vivint Solar’s fall on Wall Street, and pressure from SunEd activist investor Appaloosa Management, forced SunEdison to cut its bid on Vivint Solar in December. In midday trading Tuesday, Vivint Solar stock was down 21%, just above 4. Vivint has been the No. 2 U.S. residential solar installer, behind SolarCity ( SCTY ). SolarCity stock was up 2% early Tuesday afternoon. “Vivint Solar fundamentals have been deteriorating,” Zino said on Monday. Appaloosa owns 9.5% of SunEd yield company TerraForm Power ( TERP ). SunEdison planned to tap TerraForm Power and fellow yieldco TerraForm Global ( GLBL ) to fund its plan for hyper-growth via acquisitions, Zino said. TerraForm Global filed its IPO less than two weeks after the Vivint Solar bid was announced. Investor sentiment quickly soured on the yieldco model, taking SunEdison stock down with it. “SunEdison had a growth type of mentality, looking to aggressively spend on acquisitions and fund it via these yieldco vehicles,” Zino said. “So once that Vivint Solar transaction was announced, some investors got concerned they were maybe doing too much.” The Vivint Solar purchase was sold to SunEdison investors as a way to complete SunEd’s portfolio, he said. SunEdison planned to drop Vivint Solar’s 922-megawatt rooftop portfolio down to TerraForm Power. Appaloosa tried to prevent that, noting the rooftop assets were embroiled in debt. A judge tossed Appaloosa’s injunction last week — now a moot point, Credit Suisse analyst Patrick Jobin wrote in a research report Tuesday. TerraForm Power stock shot up as much as 15% Tuesday, on the failed Vivint Solar transaction, and was up more than 4%, near 10.65, in early afternoon trading. Before Tuesday, its shares had fallen nearly 70% since July 20. SunEdison Liquidity Questioned The vacated Vivint Solar bid frees SunEdison’s near-term liquidity by $206 million, Jobin wrote. But it also highlights how precarious SunEdison’s liquidity actually is. “Lest we forget, SunEdison has an ongoing board investigation into allegations from former executives that the company misrepresented their liquidity position, and has delayed filing their 10-K,” he wrote. Jobin maintained his neutral position and 3 price target on SunEdison stock. Zino reiterated his hold rating on SunEdison stock. Financially, it no longer makes sense to drop assets down to TerraForm Power and TerraForm Global, Zino told IBD. Like No. 1 and No. 2 solar companies First Solar ( FSLR ) and SunPower ( SPWR ), SunEdison ought to be selling assets to third-party project developers — the “lifeblood” of the solar industry. “The fact SunEdison hasn’t been able to sell projects here in recent months, it raises a lot of questions for us,” he said. “What does the market actually look like for SunEdison’s projects?” Project developers like Dominion ( D ) buy solar assets, providing up-front capital financing. SunEdison can’t afford to keep large-scale projects on its already tight balance sheet. But the third-party market could be sour on SunEdison’s assets, Zino said. “The third-party market looks good for SunPower and First Solar,” he said. “We haven’t seen any problems on their end selling projects and generating cash. But the pricing environment for SunEdison may not be the same as it is for their competitors.”