On Tuesday the market got just a little bit more information about what could happen to embattled solar energy manufacturer, SunEdison, in its legal battle against hedge fund billionaire David Tepper.
The Delaware Court of Chancery scheduled a hearing for February 16, and consolidated the Appaloosa proceeding with one brought by the Central Laborers’ Pension Fund.
And — as it happen in the natural ebb and flow of Wall Street information — by Wednesday morning the analyst reports on potential outcomes for the company started rolling into inboxes across The Street.
What are they saying? In short, the Tepper lawsuit could make SunEdison’s already precarious cash position, downright hazardous. The stock fell as much 15% on Wednesday before rebounding. At 3pm ET, it was down around 7%.
The story so far …
SunEdison stock has been in death drop mode since July, when the company made a play to buy the second largest residential solar company, Vivint for $799 million.
The stock has fallen 92% in the last six months. Huge name investors like Leon Cooperman of Omega Advisors and David Einhorn of Greenlight Capital got scalped.
To Wall Street, the Vivint deal showed that SunEdison was cash poor, and dumping over valued assets on its sister companies called yieldcos. SunEdison has two yieldcos, TerraForm Power and TerraForm Global. They buy projects from SunEdison and then manage them, kind of like any energy utility.
As the Vivint deal stands now, when the deal is done TerraForm Power will have to buy $922 million worth of Vivint assets in what’s called a take-or-pay agreement, and take on $960 million of its debt.
Tepper, who has a stake in TerraForm Power and not SunEdison, is trying to get an injunction to stop this portion of the deal.
If Tepper succeeds, according to Credit Suisse analysts, SunEdison’s already-weak cash position will get way worse.
“In our view, if Appaloosa is able to stop the acquisition of the VSLR assets and the take-or-pay agreement by TERP, and if somehow SUNE remains obligated to complete the acquisition, SUNE’s liquidity would be pressured because (1) SUNE would likely not be able to obtain the $300m secured term loan — which was supported by the TERP take-or-pay agreement, (2) SUNE would have to inject ~$300m to $560m in additional equity into the acquisition,” wrote Credit Suisse.
There aren’t a lot of way SunEdison can get out of doing this deal at this point, according to analysts, so it will have to find the cash or pull it off in a couch cushion or something. Especially because right now, private-equity firms that were once really hot on picking up solar assets have gone lukewarm.
“Overall, SUNE’s available cash would be ~$570m to $820m lower in Q2/Q3 vs. the company’s prior forecast from Jan 7th (but still positive ~$200m to ~$450m at the low point in 3Q16).”
SunEdison CEO Ahmad Chatila
Bad deal looking worse
All of this is happening at the worst possible time. If you hadn’t noticed, the credit markets have taken a battering of late, and that is pushing the cost of debt up.
SolarCity (SCTY), another residential solar company like Vivint (VSLR), last week raised finance, and the read-across was ugly.
“Cost of capital increases for residential assets following last week’s SCTY financing at a 5.8% weighted yield (5.3% weighted coupon) reflecting a ~110 bps increased spread, potentially impacting the VSLR operating portfolio asset value,” Credit Suisse said in the note.
SolarCity needs cash to calm Wall Street’s nerves. It isn’t clear where it is going to get it from.
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