It is perhaps beginning to dawn on SunEdison's shareholders that, despite having narrowly avoided a car crash, they're still driving a heap of junk (debt).
The solar-power developer's shares jumped by as much as a third on Tuesday after Vivint Solar canceled a deal to sell itself to SunEdison. Investors had feared that there was no way out of the acquisition, agreed in the summer, and that buying Vivint would tip SunEdison's already-precarious balance sheet over the edge. So: phew!
And yet, as you can see, the relief didn't last long. Virtually all the gains since Vivint's announcement have evaporated:
The stock now trades at less than $2, or 94 percent below where it was when the Vivint deal was announced. Indeed, back out the market value of SunEdison's stakes in its publicly traded yieldcos, TerraForm Power and TerraForm Global, from its own market capitalization of about $700 million, and you're left with a negative value.
So with U.S. solar installations still growing at a rapid pace, it is tempting to view SunEdison as a cheap option. Here are three reasons why that might be a mistake.
- Vivint is vexed: Vivint may have been willing to walk away from the deal, but it headed straight to the courthouse. Vivint claims a "willful breach" on SunEdison's part and is seeking damages.
How much those might eventually amount to, if anything, is anyone's guess. But the $1.2 billion drop in Vivint's market cap since that fateful day in July gives it plenty of incentive to go for the jugular. Obviously, the entire solar sector has dropped sharply since last summer, as investors have woken up to high leverage and cash burn rates. SunEdison may be the poster boy for such overextension. But claiming it is responsible for losing all that shareholder value looks untenable. The point is that this case will likely hang over SunEdison's stock for a while yet.
- SunEdison is slow: When it comes to filing its 10-K annual report with the SEC, that is. On February 29, the company rang in the leap year by announcing it was delaying the filing amid an internal investigation into claims made by current and former employees about the accuracy of what SunEdison had been saying about its liquidity. The key line was this one:
If some or all of the allegations made by these former executives and current and former employees are determined to have merit, management may be required to reassess the Company’s liquidity position as well as the disclosures in the Form 10-K, including whether the Company may require greater liquidity than previously anticipated and/or whether the sources are sufficient to meet its requirements.
That's never a great sales pitch for a stock, especially when the company is laboring under perhaps $3.4 billion of recourse debt -- according to UBS estimates -- and has negative Ebitda.
In SunEdison's case, it also adds to concerns around governance that exploded into the open late last year when two independent directors of TerraForm Power resigned and SunEdison's own chief financial officer replaced TerraForm's chief executive. That prompted a scathing letter from hedge-fund manager David Tepper warning against TerraForm being used to bail out SunEdison's struggling bid for Vivint.
That 10-K, due to drop soon, could contain some unwelcome surprises.
- Counter-party caution: SunEdison's core business is developing utility-scale solar power installations. That is one reason why the Vivint deal was viewed so skeptically by many investors; it took SunEdison into the residential solar business, which has a very different business model and counter-party credit risk (dealing with homeowners rather than utilities and businesses).
The squeeze on SunEdison's funding since the deal was announced may also have impacted another set of counter-parties: the businesses that buy its services. Last month, Hawaiian Electric terminated a contract for SunEdison to develop a solar farm, citing missed financing milestones.
Hawaiian's decision may not stand up to appeal and, in any case, may have been a one-off. But it raises the possibility of other counter-parties backing away from partnering with a highly indebted developer that also happens to have a governance question and a major lawsuit hanging over it. In a sum-of-the-parts breakdown published by UBS analyst Julien Dumoulin-Smith in January, some 60 percent of SunEdison's valuation was tied up in its development business. Any doubts about that have a huge implication for the stock price.
Doubts around lawsuits, governance and growth are poisonous for any company, but have an added dimension for SunEdison because it is one of the solar sector's largest issuers of convertible debt. It has $2.2 billion outstanding that mature between 2018 and 2025, according to data compiled by Bloomberg.
All of these issues, as you might expect, trade well below par, which at least means anyone buying now has a lower effective strike price for conversion: Weighted by the amount outstanding, these have dropped by 81 percent, on average.
The problem? SunEdison's stock price still trades at a big discount to even those beaten-down values, meaning those convertibles still look a lot like a truck-load of debt. Don't bank on a sweet ride from here.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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Liam Denning in San Francisco at firstname.lastname@example.org
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