SunEdison, the largest renewable energy firm in the world and the bane of Wall Street’s existence since July, filed for bankruptcy on Thursday.
So story over, right? One for the books. A massive company with $11 billion in debt and an SEC investigation hanging over its head bites the dust.
Not exactly. SunEdison has creditors, and those creditors are going to want things. They also may want things that SunEdison doesn’t want to give them. That is the beginning of another story. Instead of watching a stock death drop, we may be about to watch a creditor grudge match.
And it’s already becoming clear (at least a little bit) what creditors and SunEdison might be fighting over.
But first, a review
SunEdison’s story is one of a company that grew too fast, and burned way too much money in the process. According to the company’s own bankruptcy documents, it created a financial structure that “required intensive capital in order to build.”
That structure was introduced in 2014, when the company created two subsidiaries, called yieldcos, to manage the projects that it built assets for. They are called TerraForm Power (TERP) and TerraForm Global (GLBL), and while they are separate and publicly traded, SunEdison has incentive distribution rights (IDR) over them and retains a lot of management control.
Of course, to make sure that the yieldcos had projects, SunEdison had to grow. That took a lot of money.
SunEdison’s stock started crashing in July, after it announced that it would try to acquire Vivint, a residential solar company, for a 52% premium. That deal for residential assets deemed inferior to the commercial assets SunEdison usually acquired tipped investors off to the idea that SunEdison may not have as much cash as they thought.
That’s also in part because it used take-or-pay agreements with its yieldcos to finance the deal. Basically the yieldcos would have to take on projects the parent made or pay a fee.
After that the stock fell, and the rest is the stock price death drop we know today.
Cry about it
The litany of mishaps from July to now is long. There’s the missed annual report filing, the ultimately canceled Vivint deal (among a few), the missed debt payments, the embarrassing management shake-ups. Still, SunEdison plans to stay in business during its restructuring and has not included the yieldcos in any bankruptcy proceedings.
That said, you can see why yieldco shareholders might be a little upset about their arrangement with the parent. SunEdison gets a lot of cash from them legally and retains control. However, their interests might not always be aligned (like when SunEdison might want the yieldcos to buy a project they don’t want).
That is why TerraForm Power shareholder, billionaire hedge fund manager David Tepper of Appaloosa Management, sued SunEdison earlier this year. He rarely goes activist on a company, so that should tell you how dire this situation is.
From a letter he sent the company on December 1, of last year:
“Thus, it is obvious that the deterioration in TERP’s security prices and credit profile this month results from (among other things): (1) the transmission of financial stress related to its ‘Sponsor’s’ ambitious growth objectives and over-extended financial commitments; and (2) TERP’s incomplete and selective disclosures.”
In other words, you’re managing us to poverty.
‘Under my thumb is a dog who just had its day’
This is where we get to the stuff that SunEdison and its creditors may fight over. And because of the structure we just discussed, it’s not just a fight between SunEdison and its creditors. The yieldco shareholders have a dog in the fight too.
That is because one of the ways SunEdison can raise some money is by messing with its about $700 million worth of Class B shares in TerraForm Global and TerraForm Power.
There are two ways this could go, according to Credit Sights:
SUNE creditors can seek to maximise the value of those Class B shares 2 ways: 1) restart the SUNE DevCo/drop down machine by growing TERP and GLBL and possibly hitting the incentive distribution rights (IDR) splits, which would potentially increase cash sent back to SUNE; or 2) sell the Class B shares to a third party, which will likely create stronger corporate governance and investor confidence in TERP and GLBL and possibly more manageable balance sheets. We feel that option 2 may entice the market back to award TERP and GLBL with cheaper costs of capital, which in our minds should be the board’s #1 priority as the yieldcos begin their respective healing processes.
You already know what yieldco shareholders probably want — option 2. They probably want to be free of take-or-pay agreements and operate more independently.
SunEdison creditors, though, may want to retain the yieldcos to hit them up for more consistent cash. Plus, who knows who would buy the yieldcos? It might be someone(s) who won’t be as friendly to SunEdison’s management and control.
Isn’t that something you would fight over?