SunEdison (NASDAQOTH:SUNEQ) is already bankrupt, but the problems at its yieldcos TerraForm Power (NASDAQ:TERP) and TerraForm Global (NASDAQ:GLBL) are just beginning. This week, it was revealed that holders of $1.25 billion in bonds sold by TerraForm Power and $760 million in bonds from TerraForm Global have filed notice of default.
These were technical defaults, and they were expected -- primarily because neither yieldco has filed financial statements from 2015. The filings start a 90-day clock that could end in the holders demanding immediate repayment of bonds, unless those financial statements are filed. Given the fact that neither company likely has enough cash on hand for immediate repayment, that outcome would probably result in their bankruptcy.
What's really going on at the TerraForms?
I wouldn't read this as bondholders trying to suck TerraForm Power or TerraForm Global into bankruptcy. What they actually want are up-to-date financial statements, and the opportunity to start negotiating terms that will keep their bonds earning them money long-term.
On top of the financial statement delay, Moody's says that 10 of TerraForm Power's debt financings and five of TerraForm Global's are tied to SunEdison's bankruptcy in one way or another. In other words, this could be a negotiating tactic to get the yieldcos to both file financials and sweeten the terms on debt that's already technically in default.
Negotiations could lead to the yieldcos paying higher interest rates on the bonds, putting more cash in reserves, or even converting some debt into project equity. But until a company is forced to, it has no reason to sit down at the negotiating table. Now, they have one.
Bankruptcy is a very real possibility
What shouldn't go overlooked is that SunEdison's bankruptcy could pull both TerraForm Power and TerraForm Global into bankruptcy. Creditors could attempt to tie some of the money SunEdison owes them back to the yieldcos, pulling them into the mix. And the fact is, we just don't know how the bankruptcy court will handle the convoluted weave of assets and agreements between the three companies.
It's also very possible that bondholders are serious about accelerating payments and eventually forcing TerraForm Power and TerraForm Global into bankruptcy themselves. I don't think that's likely at the moment, but without recent financial statements, it's hard to say if the yieldcos really have the funds to pay bondholders back.
No matter how you look at it, TerraForm Power and TerraForm Global shares right now are a massive risk for investors. And with so many unknowns about what's going to happen in court, they're not a bet I would be willing to take, no matter how safe their projects appear to be on the surface.