SunEdison Bites the Dust
A lot can change in a year.Much to investors' dismay, albeit to no one's surprise, solar supernova SunEdison (SUNE), once a Wall Street favorite, filed for Chapter 11 bankruptcy¹ on April 21st, 2016.Subsequently, SUNE stock was suspended from the New York Stock Exchange and what was once $10 billion in market valuation was annihilated.SunEdison is still trading as an OTC penny stock with the ticker SUNEQ, the value of which has plummeted from SUNE's bankruptcy closing price of $0.34 to an even more meager price of $0.20 (yesterday's close).Just one year ago, MIT Tech Review proclaimed SunEdison the sixth smartest company in the world for "aggressively expanding its renewable energy products and building a business to provide electricity to the developing world."But in just 12 months, SunEdison's stock price plummeted a whopping 99%.THE RISE, THE FALL, THE DEMISE.How does a $10 billion company... just, crumble?A few years ago, investors were fueling money into SunEdison.And SunEdison served its investors' portfolios well, dominating the development and financing of renewable energy projects for a slew of clients, and becoming one of the fastest growing power generation companies in the country.In 2014, following the footsteps of competitor NRG Energy, Inc., SunEdison architected two yieldcos, otherwise known as publicly traded subsidiaries, established to lower SunEdison's cost of capital and help fund the company's pipeline of solar projects. The yieldcos would raise cash from public shareholders in order to buy operational power projects from SunEdison. The intent was that the yieldcos, named TerraForm Power and TerraForm Global, would keep sufficient cash flowing back to SunEdison, and in turn the money generated from the power projects would cover debt payments and pay shareholders cash dividends. Although yieldcos are technically separate and publicly traded, the parent often maintains incentive distribution rights (IDR) and a substantial amount of management control.NRG Energy, Inc. had proven this strategy to be lucrative, raising $450 million from taking its own yieldco public.But the yieldco strategy only works if dividend yields are low enough, low-cost debt is available, and if the yieldcos can acquire enough projects to generate sufficient cash. This requires a lot of money."Pipeline took precedence over profitability and high cost leveraged buyouts provided the growth steroid," explained a senior executive at SunEdison (who wishes to remain anonymous).HOW MUCH LEVERAGE IS TOO MUCH LEVERAGE?In just a two-year time span, SunEdison and its yieldcos had engaged in acquisitions equating to over $5 billion in value, deteriorating the company's liquidity position and massively raising interest expenses. Coupled with a multitude of lawsuits as a result of over-promising and under-delivering, the company drove itself into the ground by trying to grow too large, too fast. Cash on hand become increasingly insufficient to cover ballooning debt payments.One particularly devastating leveraged acquisition took place on January 29th, 2015, when SunEdison and yieldco TerraForm Power (TERP) purchased wind turbine powerhouse, First Wind Holdings, for $2.442 billion. With up-front costs of $1.9 billion (and a $510 million earn-out), SunEdison had to use a heavy amount of financial engineering to meet the terms of the deal. The acquisition was funded by a combination of yieldco cash reserves, senior secured notes, and a $1.5 bn line of credit. To buy a $2.4 billion company, SunEdison did not use a single dollar of its own cash, instead flipping $190 million worth of shares in an affiliate, SunEdison Semiconductor, to pay for the cash portion of the acquisition. The market, at the time, was more than happy to fund $740 million of new debt, plus a $1.5 billion line of credit. The yieldcos picked up the rest.Propelled with confidence from its successful financial engineering of the First Wind deal, SunEdison and yieldco TerraForm Power purchased Atlantic Power for $350 million a short six months later (June 26, 2015), almost entirely funded with debt.On July 20th, 2015, SunEdison announced its intent to acquire Vivint Solar (VSLR), a large player in the residential solar space, for $2.2 billion, planning to fund the purchase with a combination of cash, stock, and convertible notes.The market was less than pleased, and investor discomfort drove SUNEQ stock price downward. In response, SunEdison attempted to renegotiate the Vivint Solar deal to reduce the potential negative impact on its liquidity position. However, viewing the now highly leveraged anticipated acquisition of Vivint Solar as detrimental, given SunEdison's existing leveraged positions, Standard & Poor's downgraded TerraForm Power from B+ to B-. TerraForm Global was also downgraded from B+ to B.The impact of the Vivint Solar deal, or near deal, was even broader than the downgrades. Because of the pending deal, SunEdison was not able to file its 10-K on time. In March 2016, Vivint Solar not only terminated the agreement, but also sued SunEdison for not adhering to the previously agreed upon terms of the acquisition deal.The final nail in the coffin came when large investors like Greenlight Capital and Third Point sold SunEdison positions.WHAT'S NEXT?
"Our decision to initiate a court-supervised restructuring was a difficult but important step to address our immediate liquidity issues." - Ahmad Chatila, CEO, SunEdison.
SunEdison has publicly stated its intent to use the Chapter 11 filing to "fix" its balance sheet, specifically to eliminate non-core assets and reduce debt.According to the filing at the Manhattan federal court, SunEdison faces $16.1 billion in debt ($20.7 bn in assets) making this the largest U.S. bankruptcy in over a year. SunEdison also listed over $750 million of unsecured claims that the company intends to dispute.SunEdison's bankruptcy wipes out equity investors...but what about the yieldcos?SunEdison has decided not to include the yieldcos in the bankruptcy proceedings, but TerraForm Power and TerraForm Global are already suffering. TerraForm Power has been sued by two creditors, and TerraForm Global is suing SunEdison for misappropriating $231 of assets, accusing its parent of using the company cash to cushion its balance sheet rather than for renewable energy projects in India, as promised.Further threatening the yieldcos' ability to meet dividend payments is the fact that 10 of TerraForm Power Inc.'s wind and solar farms and 5 of TerraForm Global's are facing defaults due to project-level debt tied to the financial health of SunEdison.Is SunEdison's fall indicative of the future of the solar industry?"This is a highly competitive industry with a massive upside. As with other rapidly growing and successful industries, not every company in the solar market is going to stand the test of time. SunEdison is just one company and today's development does not reflect a trend of the broader industry. The solar industry is growing at warp speed. It took us 40 years to get to 1 million installations (which we have just done) and it will take us just two more years to hit 2 million and that, I think, illustrates the direction of the solar industry." - Dan Whitten, VP of Communications for the Solar Energy Industries Association.The deterioration of SunEdison has little to do with the fact the company is (was?) in the renewable energy industry, rather, that SunEdison relied on financial engineering and healthy capital markets, and built a business on leveraged acquisitions, unreliable project management, overly ambitious growth, and poor decisions.
¹A Chapter 11 proceeding, under the US bankruptcy code, is a court-supervised process that allows a corporation to restructure its debt while upholding the business as a going concern. The debtor (in this case, SunEdison) receives a period of breathing room, legally known as "the Stay" during which creditors are not able to enforce actions against the debtor without receiving permission from the court.