SunEdison, a solar manufacturing company, fell 35% on Thursday after the company announced that it intends to raise money and restructure its debt in order to pay back $738 million worth of debt.
Now, you may be thinking, debt reduction, that’s a good thing.
Well, like many things in life, the devil is in the details.
In order to raise this money SunEdison will be restructuring old loans at a much higher rate and issuing a bunch of stock. Investors’ worst fear about the stock is real. SunEdison is cash poor.
If it wasn’t, the company wouldn’t have to raise money on terms that sounds like this [emphasis ours]:
The Second Lien Facilities will be comprised of $500 million of A1 loans, and $225 million of A2 loans, each of which will bear interest at a rate of LIBOR + 10.0% per annum and will mature on July 2, 2018. Lenders under the A1 portion of the facilities will receive warrants exercisable at any time for an aggregate of 19.8 million shares of common stock, and lenders under the A2 portion of the facilities will receive warrants exercisable at any time for an aggregate of 8.9 million shares of common stock, in each case at an exercise price of $0.01 per share. The Second Lien Facilities will contain customary covenants, representations and warranties and events of default.
Wall Street started selling SunEdison back in July after it announced that it would acquire a residential solar installer called Vivint.
Investors hated this for a couple of reasons. First off, they saw SunEdison as a company that did large scale projects, not one that stuck solar panels on people’s houses.
Secondly, they hated the deal because, in order to do it, SunEdison was going to sell a bunch of projects to one of its subsidiaries — TerraForm Power. TerraForm Power is one of two of SunEdison’s yieldcos — companies that buy projects from SunEdison and manage them, collecting payment much like a utility.
Investors thought the assets SunEdison was trying to sell were over-valued. It was a sign to them that SunEdison needed cash, and was willing to dump on its subsidiary to get it.
“This deal sparked concerns about the quality of underlying cash flows, the premiums being paid for portfolios, and underlying discounted cash flow assumptions,” UBS said in a note back in December.
Now that the company is raising cash any way it can, investors are getting a flashback to this summer, so it’s a fire sale all over again.