SunEdison, once the nation’s largest renewable energy developer, has filed for bankruptcy listing total debts of $16.1 billion and assets of $20.7 billion. The filing caps a quick and severe demise for the company, which at this time a year ago was one of the favored stocks on Wall Street and in the midst of a multi-billion dollar acquisition binge.
It was financial maneuvering that turned SunEdison into a hedge fund darling, but that also led to its failure.
The company, under its previous name MEMC Electronics, once was predominantly a manufacturer of solar wafers, a business that mostly failed in the United States when state-backed Chinese developers began engaging in a price war. In 2009, MEMC acquired SunEdison, diversifying the combined firm into a developer of solar panel projects and away from panel manufacturing.
Then, with the instruction of a little known hedge fund, it began to press hard into renewable power generation. SunEdison shed its legacy wafer business, SunEdison Semiconductor, roughly two years ago. Months after the spin, it pioneered the use of publicly traded yiedcos to absorb solar and wind assets. In July 2014, the company listed TerraForm Power on the Nasdaq, the first solar yieldco. A year after that, it listed TerraForm Global, in a push to expand internationally.
These yieldcos allowed SunEdison to acquire solar and wind assets at attractive financing costs versus peers. With this advantage, SunEdison quickly became the biggest dealmaker in the renewable energy industry. Acquisitions included First Wind, Mark Group, the renewable portfolios of Atlantic Power and Invenergy, and culminated in a $2.2 billion takeover effort for Vivint in the summer of 2015.
The deals, in addition the company’s organic projects, helped SunEdison deliver 640 megawatts of power in the third quarter and a project pipeline of 7.9 gigawatts at the time, making it one of the fastest growing power generation companies in the country. But SunEdison stretched itself financially to pull off the growth spurt, piling up $11.6 billion in debt and development capital commitments of nearly $9 billion.
SunEdison’s yieldcos were supposed to relieve the company of its balance sheet constraints – this was the financing mechanism that lured in hedge funds like David Einhorn’s Greenlight Capital – but they stopped working. Yieldco investors began to question the return of the deals SunEdison was striking. Mark Group, a push into Europe, failed miserably for TerraForm Global. Vivint Solar’s residential rooftop arrays struck many TerraForm Power shareholders as a radical departure in strategy from projects with investment grade rated utilities.
These investor concerns hit a boiling point in the fall of 2015, when SunEdison was working to re-negotiate the acquisition of Vivint Solar. As FORBES first reported, independent directors on TerraForm Power’s board balked at the deal in a testy November meeting. Instead of listening, SunEdison seized control of TerraForm’s board and pushed the deal through. Similar changes were made to the board of TerraForm Global.
The yieldco unfriendly maneuvers drew the ire of hedge fund billionaire David Tepper, who waged a public battle against the Vivint deal. Tepper sued SunEdison accusing it of coercing yieldco acquisitions to relieve its own financial distress. At the same time Tepper was waging his legal battle, TerraForm’s former management began to accuse their parent, SunEdison, of misleading disclosures surrounding its financial health.
In late February, SunEdison delayed filing its annual 10-k due to these accusations, causing the Vivint deal to collapse. In litigation, it was also revealed that SunEdison used a board coup at TerraForm Global to access cash to repay a controversial margin loan in November. By late March, SunEdison warned of an imminent restructuring due to its high debt load, inadequate liquidity and delayed financials.
The Securities and Exchange Commission is reportedly investigating SunEdison’s disclosures, and Tepper continues to sue SunEdison in an effort to restore independence on TerraForm’s board. (SunEdison recently said its board has found no evidence of wrongdoing, or impropriety in its financial disclosures)
While equity investors in SunEdison will be wiped out the company’s bankruptcy, attention now turns to the company’s yieldcos.
Tepper has built a near 11% stake in TerraForm Power on the assumption that it owns attractive solar and wind developments, which have value even if parent SunEdison fails. And according to this logic, a bankruptcy may mean TerraForm Power and TerraForm Global are no longer the dumping grounds and piggybanks for SunEdison.
That trade will now be put to the test during SunEdison’s restructuring.
Although SunEdison’s Chapter 11 could be relieving for TerraForm, it also might pull in the yieldco into the orbit of bankruptcy courts. After all, SunEdison’s bankruptcy filing consolidates the assets and liabilities of its two yieldcos, neither of which filed for Chapter 11 on Thursday. SunEdison creditors could seek TerraForm assets as a form of recovery, crimping TerraForm’s value.
Tepper is a savvy investor when it comes to distressed investments, having reaped small fortunes from restructurings like Enron, Conseco, Adephia,General Motors GM +1.68% and Delphi. But so far, the market is taking a wait and see approach.
TerraForm Power shares were trading higher by 7% in early trading on Thursday and they’ve gained 11% since SunEdison’s bankruptcy began to look like an inevitability. Nonetheless, TerraForm Power trades well below its standalone value — shares are down 75% over the past year.
“SunEdison had no option but to file for bankruptcy after the Vivint merger fell through and it became clear no additional sources of liquidity were forthcoming,” says Max Frumes Senior Editor at Reorg Research.
“This is not a prepackaged or prearranged bankruptcy, so many details need to be worked out, and given the second lien group and other stakeholders in the yieldcos include a number of very sophisticated hedge funds, this will make for a potentially long, hard-fought process,” he adds.
A tell on whether bankruptcy will be a relief or drag on TerraForm surrounds SunEdison’s 43% stake in TerraForm Power Class B shares.
On March 17, SunEdison presented second lien lenders with three scenarios for a bankruptcy. In two of those scenarios, it will raise lifeblood capital by selling down the 43% stake TerraForm stake, thus also removing its influence over the yieldco that Tepper has long challenged. A third scenario, however, contemplates a plan to raise $310 million in debtor financing, allowing SunEdison to retain its TerraForm shares.
“We believe the potential liquidation of Class B shares is a key step towards greater yieldco independence and potentially stronger corporate governance,” say CreditSights analysts Greg Jones and Andy DeVries.
By: Antoine Gara (Forbes).
Photo: Richard Drew (AP).
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