Looks like now-former TerraForm Global Inc (GLBL) and TerraForm Power Inc (TERP) CEO Brian Wuebbels was exactly right last week when he — as part of a warning that TerraForm Global would be filing its quarterly results after their official due date — also warned that parent company and close-partner SunEdison Inc (SUNE) was likely to file bankruptcy.
He just may not have known how soon he would be right.
It has been reported by more than one credibly source that SunEdison is indeed preparing to file bankruptcy. The big question owners of SUNE stock are posing: Now what?
For better or worse, this Chapter 11 bankruptcy process (if the rumors are true) should follow the same process as any other bankruptcy. That is, SunEdison will now start to sell whatever it can for whatever price it can get for it, pay its creditors what’s feasible, and whatever’s left — if anything — will go to SUNE shareholders.
Just bear in mind that with $11.7 billion in debt, there’s not going to be much of anything left once the dust settles.
Goodbye, SunEdison. We Hardly Knew Ye.
And thus ends the solar yieldco experiment … or at least SunEdison’s version of it.
On Monday, the Wall Street Journal reported the solar-power developer was in talks with two creditors to facilitate its wind-down and liquidation. In fact, the buzz is that it has already found a buyer for its assets in India, underscoring the premise that the company is already looking for the most cost-effective ways to break itself up and pay what bills it can.
While dramatic, the reports can’t come as a real surprise to anyone who’s been following the SUNE saga.
The inability to ever actually fund the purchase of Vivint Solar Inc (VSLR) acquisition was a red flag of fiscal trouble. Even more alarming was last week’s news that the SEC was probing the company’s accounting, concerned that the recent balance sheet overstated how much cash was actually available as cash.
The Department of Justice is digging around too, looking for — among other things — potential wrongdoing with how the pending deal with Vivint was terminated. Throw in the fact that spinoff and partner yieldco TerraForm Global is now filing a suit against SunEdison, claiming an inappropriate use of TerraForm Global’s cash, and what you’ve got is a lot of smoke that can only indicate there’s some sort of fire burning somewhere.
And yet, the rise and fall of SunEdison shouldn’t in itself deter investors from the yieldco idea.
Granted, the environment of rock-bottom natural gas prices hasn’t helped TerraForm Global or any other solar yieldco. Where SunEdison arguably went wrong, however, was its willingness to take on too much debt for too little return on its investment in solar power assets.
The core vulnerability in the yieldco model is committing too much capital — even cheap money — and keeping it tied up for too long at too little of a profit. The delicate financial engineering of this arrangement specifically performed by SunEdison not only left no margin for error, it assumed neither the lending environment nor the solar power market would ever hit a headwind. The debt-overload simply accelerated the inevitable meltdown of its capital structure and subsequent functioning of the yieldco model — a model that’s actually growth-oriented in an income-oriented disguise.
It was never going to last, and it didn’t.
Bottom Line for SUNE Stock
For those investors still holding SUNE stock, after a 99.3% pullback from July’s peak levels to the current price of 24 cents, there’s not any blood left to give. From that perspective, there’s a mildly decent argument for holding onto it on the off chance some sort of miracle materializes between now and the end of its Chapter 11 proceedings; maybe there will be some sort of salvageable value.
The two exceptions to that line of thinking would be harvesting the loss to offset any taxable gains on other trades, and foregoing the reorganization fees that many brokerage firms now charge to process such corporate restructurings.
Either way, let be the SunEdison meltdown be a reminder to everyone that (1) not all clever business ideas justify amassing a mountain of debt to put in motion, and (2) stop-losses can keep you out of trouble before emotions can cloud your judgment.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
