SunEdison Spectacle Pushes Solar ETF Shorts to Nine-Month High

  • Short interest in solar ETF stocks almost triple S&P 500
  • Rising rates and changing regulations bring scrutiny to solar

SunEdison Inc.’s market travails are striking fear into the hearts of solar power investors.

Bearish bets are stacking up in stocks in an exchange-traded fund tracking the energy companies, with the average proportion of shares borrowed and sold above 7 percent of shares outstanding, according to data from Markit Ltd. That’s the highest for the group since February and almost three times the ratio in Standard & Poor’s 500 companies.

The average stock in the fund, the Guggenheim Solar Energy Index ETF, has fallen about 25 percent in the past six months as SunEdison, once a favorite among hedge fund managers, erased more than 90 percent of its value. Earnings sunk and investors questioned the viability of a dividend-heavy business model amid expectations for higher U.S. interest rates.

“I’m sure there are plenty of guys out there looking at these companies like SunEdison and thinking to themselves about how much access to capital is going to cost in a rising rate environment,” said Benjamin Dunn, president of Alpha Theory Advisors, which works with hedge funds overseeing about $6 billion. “There could also be quant managers getting involved from a momentum standpoint, shorting things that are going down.”

Yieldcos, a popular business model in the renewable-energy business in which companies create separate units to own and operate power plants and to provide capital for the developer to build new projects, have come under scrutiny with investors expecting the Federal Reserve to raise interest rates in December. TerraForm Global Inc. and TerraForm Power, both SunEdison yieldcos with dividend yields of 15 percent, have lost about 70 percent since July.

Skeptics this year increased shorts in Elon Musk’s SolarCity Corp. by the most among stocks in the solar ETF, with 23 percent of the company’s shares borrowed and sold short, according to data compiled by Andrew Laird, an equity product specialist at Markit. That’s 10 percentage points higher than at the start of the year. The company announced last month a strategic slowdown to focus on making a profit.

Short interest in Abengoa Yield Plc has climbed 4.4 percentage points to 6.9 percent as its corporate parent seeks protection from creditors.

To be sure, investors are shorting just about everything in the U.S. equity market. The average short interest in companies in the S&P climbed above 3 percent at the height of selling in August, and despite dipping briefly, remains elevated.

Still, eight of 25 stocks in the ETF have erased at least half their value in the past six months and the fund has declined 45 percent since April amid questions about the solar industry’s future. Solar subsidies in the state of California, the largest U.S. solar market, are set to change in 2016. In addition to a reduction in the value of a government tax credit, the rates paid to rooftop solar owners will likely be cut, according to Bloomberg Intelligence analysts Cheryl Wilson and James Evans.

“The solar energy industry has been depressed by cooling investor appetite towards clean energy-owning yieldcos, a planned cut in the U.S. solar investment tax credit from 30 percent to 10 percent at the end of 2016 as well as ongoing solar energy trade uncertainty between the U.S. and China,” Evans said via e-mail.

The losses have been a headache for hedge fund managers. Of the 18 U.S.-listed stocks in the ETF, the funds own an average 20 percent of shares outstanding, according to data compiled by Bloomberg. That compares with an average 7.5 percent of companies in the S&P 500.

David Einhorn’s main hedge fund at Greenlight Capital has fallen almost 21 percent this year due in part to a stake in SunEdison equal to 5.9 percent of the company’s shares, according to a Sept. 30 filing. Valinor Management LLC and Point72 Asset Management LP also had stakes of at least 2.4 percent in the company as of recent filings.

“The sector had a pretty big run-up in 2013 and now the last couple months it’s really been tanking,” said Markit’s Laird. “It’s hard to really put your finger on what’s been driving it but there seems to be a lot of movement in the sector as a whole.”

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