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.”