A clock is ticking for TerraForm Power (NASDAQ:TERP) and TerraForm Global (NASDAQ: GLBL), and if the companies don't handle it well, there could be a time bomb waiting for both at the end of the summer.
On May 31, according to The Wall Street Journal, holders of $1.25 billion in TerraForm Power bonds and $760 million in TerraForm Global bonds filed default warning notices. If the yieldcos don't file their 2015 financial statements within 90 days, those bondholders could demand immediate repayment on their debts, which would likely lead the yieldcos to bankruptcy.
Why the time bomb is ticking
This whole fiasco started when the now-bankrupt SunEdison (OTC:SUNEQ) revealed that it had internal accounting problems, causing it to delay its own 2015 10-K filing with the SEC. Since TerraForm Power and TerraForm Global use some of the same systems, both yieldcos were affected.
When SunEdison did finally file for Chapter 11, it still hadn't reported its 2015 financials. And that's where things get really sticky.
Neither yieldco is technically part of the bankruptcy proceedings, but both shared management with SunEdison throughout most of their existence, and they've been intertwined through both traditional dropdowns from SunEdison as well as helping to fund its acquisition spree. TerraForm Power, in particular, is being sued by D.E. Shaw and Madison Dearborn Capital for $231 million as part of an unpaid earn-out from the First Wind acquisition. This is on top of at least a half a dozen other lawsuits related to the trio of companies.
Now, debt holders have to be worried that they'll be left holding the bag after SunEdison's bankruptcy, which could leave the yieldcos weakened. And since they haven't seen financial statements since after the third quarter of 2015, it's within their right to argue that both yieldcos are in default.
The race is on for the TerraForms
What's troubling for both TerraForm Power and TerraForm Global is that they're entangled in the SunEdison bankruptcy, reliant on the company for back-office services, and now they face a deadline from bondholders that could lead to financial ruin. The companies know what the deadline is and what the consequences of missing it could be, but they don't necessarily have full control over avoiding those consequences.
It's also not clear what SunEdison's strategy will be in its own bankruptcy case. There are rumors that assets are being shopped, indicating that liquidation could be an option creditors might take. But where would that leave TerraForm Power and TerraForm Global, which were so intertwined in the SunEdison machine?
It's an unenviable position for the yieldcos' management teams, some of whom helped get the companies in this mess in the first place. At least we know that the clock is ticking for TerraForm Power and TerraForm Global. We just don't know what will happen before the potential bomb goes off, nor what the consequences would be if creditors do force the companies into early repayment of their debt. I just know that this is a risky set of companies that I'm not willing to bet on.