SunEdison Bankruptcy Threatens Dividends at TerraForm Units

  • As many as 15 TerraForm power plants may be facing default
  • There may be `a stoppage of distribution from these projects'

SunEdison Inc.’s bankruptcy threatens the dividend payments of the two TerraForm yieldcos it formed and controls, according to Moody’s Investors Service.

While the yieldcos haven’t been dragged into SunEdison’s bankruptcy proceedings, as many as 10 of TerraForm Power Inc.’s wind and solar farms and five of TerraForm Global Inc.’s face defaults because they have project-level debt with clauses linked to the health of the parent company, according to a report by Moody’s analyst Swami Venkataraman.

These cross-default clauses reveal the complicated and interrelated structure of SunEdison, the world’s biggest clean-energy developer, and the two TerraForm companies it formed to buy power plants, along with the many wind and solar farms that typically are structured as their own corporate entities.

“There might be a price to pay, and possibly a stoppage of distribution from these projects to the yieldcos,” Venkataraman said in an interview. “They will need some sort of settlement.” He estimates that the risk affects less than half of the cash flow at TerraForm Power because many of its projects have no debt.

Dividend Targets

Such a stoppage -- even a short one -- may jeopardize the yieldcos’ ability to meet dividend targets. The companies fund their dividends with revenue from selling power, usually to utilities. A spokesman for both TerraForm Power and TerraForm Global declined to comment.

The potential cross-defaults are “generally curable,” Venkataraman said. Lenders often approve waivers or forbearance agreements for power plants that meet performance targets and repay their debt on schedule.

Those waivers probably will carry costs, said Michael Morosi, an analyst at Avondale Partners LLC.

“The banks are going to ask for something in return,” Morosi said in an interview. “Whether it’s reserving additional cash at the project level or posting additional collateral, both will be a drain on liquidity and distributable income.”

Cross Default

The yieldcos are in this position because some of the financings for their projects have clauses that may be triggered upon a SunEdison default or bankruptcy. That may potentially lead to defaults in the projects’ financings. While SunEdison doesn’t own these power plants, it developed many of the yieldcos’ assets, and in some cases remains their operator.

“The path of least resistance might be having project-level lenders renegotiate terms on the debt, either accelerating amortization schedules or trapping cash at the project level,” Greg Jones, an analyst with CreditSights Inc., said in an e-mail. “Which is why we see risk to TerraForm Power’s cash available for distribution.”

TerraForm Power and TerraForm Global have acknowledged the cross-default risk.

“A SunEdison bankruptcy could result in a default under many of our non-recourse project-debt financing agreements; however, these defaults are generally curable,” TerraForm Power said in an April filing. “If SunEdison files for bankruptcy, we will work with our project lenders to obtain waivers and/or forbearance agreements as we seek to cure such defaults, however no assurances can be given that such waivers/forbearance agreements will be obtained.”

In a presentation filed Thursday evening, the yieldcos listed avoiding “project-level defaults” among the “key areas of focus to ensure near-term stability.” They said they’re evaluating non-recourse financings.

SunEdison filed for bankruptcy protection on April 21, listing $16.1 billion in liabilities.

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