Image source: SunEdison.
TerraForm Power Inc (TERP) and TerraForm Global Inc (NASDAQ: GLBL) could be big winners for investors over the next few years. Their implied dividend yields of 16.6% and 39.6%, respectively, give each company some breathing room, so even if they had to cut dividends due to concessions to debt-holders related to SunEdison Inc.'s (NYSE: SUNE) bankruptcy, they could still be big winners.
However, there are so many unknowns, they're risky bets for investors. And all of the lawsuits flying around are one of the biggest reasons to be leery of these investments.
Lawsuits could take years to play out
Let's start with the convoluted relationship between TerraForm Power and TerraForm Global with their parent company, SunEdison. Moody's says 10 of TerraForm Power's projects have financing deals tied to SunEdison's health, and TerraForm Global has five such clauses. Renegotiating debt and/or power purchase agreements around the world could take a long time, leaving investors in limbo and uncertain of how secure these investment could be.
Image source: SunEdison.
There's also a flood of proposed class action lawsuits against TerraForm Power and TerraForm Global alleging federal securities fraud. Not only could these take a long time to litigate, if there are damages, it could cost the yieldcos millions, limiting future upside for investors.
David Tepper's Appaloosa Management, which has stakes in both TerraForm Power and TerraForm Global, has also sued the former to overhaul its conflicts committee. Tepper has been a thorn in the side of SunEdison for months and has the patience to wage a protracted war for the yieldcos.
Then there's the lawsuit TerraForm Global has against SunEdison, alleging $231 million in misappropriated funds. That's now tied up in bankruptcy court, and we have no idea where the yieldco could fall in the line of creditors SunEdison owes.
Finally, D.E. Shaw and Madison Dearborn Capital say they're still owed $231 million in relation to the First Wind buyout, and they say TerraForm Power is responsible since it took the operating assets and SunEdison is bankrupt.
What do the financials really look like?
To add to the legal mess TerraForm Power and TerraForm Global find themselves in, investors have no clue what the companies' financials look like. Neither yieldco has filed a financial report with the SEC since the third quarter of 2015. Yes, we're coming up on nine months without up-to-date financials.
Between the lawsuits and the fact that we have no idea what financials look like for TerraForm Power and TerraForm Global, these are stocks I'm not looking to buy at the moment. There could be a significant upside, but the risk is enormous, and small investors would just be along for the ride as hedge funds and bankruptcy lawyers fight for scraps. There may not be much left when they're done.
