SunEdison, the biggest solar energy manufacturing firm in the entire world, is nearing bankruptcy.
Its decline has been swift and brutal, taking some of the most legendary names in finance with it.
The stock that was once a hedge fund darling has turned into Wall Street’s nightmare.
A company that was once worth more than $10 billion is now valued at $150 million, with close to $8 billion in long-term debt.
This is because the company’s business structure, which was once considered quite complex, was in a matter of months found to be quite simple — it simply could not generate enough cash.
The simple truth started to reveal itself to Wall Street in July, when SunEdison’s stock started its 98% descent. The tip was a deal. The company wanted to pay a 52% premium for a residential solar firm called Vivint.
Not only was that too expensive for investors to stomach, but they felt residential assets were not part of SunEdison’s more lucrative commercial vision.
So they sold, and sold, and sold.
Now the company is facing challenges on all sides.
The SEC is investigating whether or not the company may have lied to investors about its cash position during some of its darkest times last fall. Billionaire investor David Tepper of hedge fund Appaloosa Management, an investor in one of SunEdison’s subsidiaries, is agitating for change at the company. And now, the company is preparing to file for bankruptcy.
But we’ll get to that in a moment. First lets talk about the deal that brought it all down.
From darling to demon
It’s impossible to talk about SunEdison without talking about what a darling the stock once was. In October of 2014 hedge fund billionaire David Einhorn of Greenlight Capital pitched the stock as a long position at an elite investment conference. He called SunEdison “a well‐run, financially savvy company, benefiting from an open-ended growth opportunity trading at a bargain price.”
Part of SunEdison’s “financial savvy” was its structure. The company has two subsidiaries known as yieldcos. The yieldcos are supposed to act like utilities for the solar projects it builds, collecting fees and funelling those back to the parent so the whole system would have cash.
One of SunEdison’s yieldcos is TerraForm Power. It handles US domestic projects, and David Tepper has a near 10% share in the stock. The other is called TerraForm Global. It handles international projects.
As is Wall Street’s wont, investors followed Einhorn into the trade. By August of the following year they were regretting that. In July — when SunEdison’s stock was about $30 — the company announced that it would buy Vivint, and the expensive deal sent investors running for the hills.
And it eventually sent Tepper to court.
‘We don’t start things just to start things’
By November, SunEdison’s stock price was around $7, and the company decided to shake up its board and Conflicts Committee. That led to two board members leaving the company, saying they could no longer in good faith say they were doing what was best for shareholders.
Appaloosa started fighting with SunEdison over the Vivint deal, but really the fund’s consternation was about deep issues with the company’s corporate governance — the same issues that led some of the company’s board members to leave.
To execute the deal, SunEdison created take-or-pay agreements for its yieldcos. In short, TerraForm Power would have to take on SunEdison projects or pay a fee. This did not suit Appaloosa.
“The July announcement of the acquisition of the Vivint Solar (‘VSLR’) portfolio of residential rooftop assets marks an unfortunate departure from this business model and appears to serve the sole purpose of promoting SUNE’s desire to acquire VSLR’s development and operating assets, rather than enhancing the quality and value of TERP’s holdings,” Tepper wrote in a December letter before filing the lawsuit.
When Appaloosa did file its lawsuit in January, the stock was at $2.81.
Watching all of this drama, Vivint eventually pulled out of the deal in early March. The company said that it did not think that SunEdison had the cash to pull the deal off, and that it would take legal action. Meanwhile, SunEdison was pulling out of all sorts of deals left and right.
Then, on Tuesday, TerraForm Global, announced that its parent was in danger of going bankrupt. That sent SunEdison’s share price crashing, dropping to below $0.50.
On Wednesday, it was announced that Brian
Wuebbels, CEO of both of SunEdison’s subsidiaries, TerraForm Power and TerraForm Global, would step down from his post. That marked a small victory for Tepper, who had pushed for his removal. Still, though, he wants to see further changes.
The DOJ, meanwhile, want to see all of the documents surrounding the Vivint deal.
This is far from over.
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