What: A day after SunEdison Inc's (SUNEQ) shares dropped 22%, the stock is down another 15% in early trading on Wall Street. Yesterday, the concern was a bigger-than-expected loss in the third quarter, but today the problems at TerraForm Power (TERP) and TerraForm Global (NASDAQ: GLBL), whose stocks are down 4% and 5% today, have come into focus.
So what: The entire premise of SunEdison's value was that it would be able to sell projects to captive yieldcos for high prices, generating a margin up front, and own a portion of projects long-term that would pay a dividend. If growth was strong enough, it would hit incentive distribution rights (IDRs), which allowed SunEdison to take a disproportionate percentage of quarterly payouts from the yieldcos long-term.
Just look at David Einhorn, one of SunEdison's biggest shareholders, explaining last year that SunEdison was worth $32 per year, based on $15-$16 per share in value for the development business, $4-$5 per share in the value of TerraForm Power shares, $9 for the TerraForm IDRs, and some other small pieces. Today, both yieldcos have implied dividend yields of over 10%, making buying projects from SunEdison nearly impossible, lowering the value of the direct ownership, lowering the value the development company can get for projects, and virtually eliminating the possibility of IDRs in the future. Basically, the entire investment thesis has fallen apart in the past year because these three stocks are down so much.
Add to that the fact that SunEdison, the development company, has $7.9 billion in debt and is losing money, and you have a recipe for disaster. Without the high margin sales to yieldcos, the value proposition is difficult to see at all.
Now what: Many investors didn't realize how dependent SunEdison was on high stock prices for its own stock as well as the stock of its yieldcos. But as all three have fallen, it's made the business nearly impossible to run profitably, especially with $11.7 billion in total debt among the companies.
Management says SunEdison will be cash flow breakeven by the middle of next year, so that's the big hope for bullish investors, but it's far from a certainty. Until I see progress on a financial front and a profit from selling projects, this is a stock I'll stay far away from. The downside risk is just too big, something even big hedge fund investors are finding out the hard way.
