The back and forth battle between bankrupt SunEdison and its yieldcos TerraForm Power Inc (TERP) and TerraForm Global Inc (NASDAQ: GLBL) continued this week, and it may not be for the better. Bloomberg is reporting that SunEdison is contemplating restructuring itself with the TerraForm yieldco stakes intact.
This follows weeks of speculation that SunEdison would sell its stakes in TerraForm Power and TerraForm Global, continuing the liquidation of assets. But creditors and SunEdison may see more value in keeping the yieldcos in SunEdison's possession and betting on a recovery in their share prices. What happens to SunEdison's stake could determine the future of both companies.
The stakes in TerraForm Power and TerraForm Global are probably SunEdison's two biggest assets in bankruptcy. And both SunEdison and creditors will want to maximize the value they get for the shares SunEdison owns and the incentive distribution rights, a bonus paid based on the dividend payout, in both yieldcos.
One option would be to sell the stakes and just pay creditors whatever cash is generated. This idea has been rumored recently with Appaloosa Management and Brookfield Asset Management seen as potential bidders.
However, if the price bidders are willing to pay isn't high enough, the better option could be to restructure SunEdison's balance sheet and hold onto the yieldco stakes. SunEdison itself would likely become a much smaller renewable energy developer, and the yieldcos would be a key asset. And if you look at the recovery in shares of late, you can see why creditors may see value in a future recovery of both yieldcos.
Whether or not the assets are sold, the goal will be to maximize value. And this is where shareholders in the yieldcos have a vested interest in the outcome of these negotiations.
One thing the TerraForms have to get right
No matter who owns the controlling stake in TerraForm Power or TerraForm Global, they'll have to prove to the market that the yieldcos can be operated effectively and buy projects judiciously. When the market lost confidence in the yieldcos, that's when their stocks started to plunge, eventually leading SunEdison to file for bankruptcy.
Market confidence is also key for future growth. If the dividend yield on either stock is too high, it won't allow the yieldcos to issue new shares to buy projects. And buying new renewable energy projects is how they'll grow dividends long term.
Breaking entirely free of SunEdison may be the best thing for TerraForm Power and TerraForm Global shareholders because it would give the market confidence that SunEdison won't abuse them again, but that may not happen if SunEdison is restructured. Keep an eye on how these negotiations work out, because they could determine where both companies are headed from here.