There wasn't a lot that went right for TerraForm Global Inc (NASDAQ: GLBL) in 2016. The company's sponsor, SunEdison, went bankrupt, throwing the company into turmoil. Since the yieldco used SunEdison's back-office capabilities, like accounting, it caused a delay in filing reports with the SEC.
A suspended dividend didn't help instill any confidence that TerraForm Global would live up to its billing as a cash flow stock, and it's unlikely the previous $1.10 per share dividend will return. With all of the uncertainty, it's possible 2017 could still be the company's worst year yet.
TerraForm Global is becoming increasingly attractive
On Monday, TerraForm Global said it has paid down its revolver, which reduces its risk of default, and has $583 million in unrestricted cash on the balance sheet and a fairly manageable $425 million in net consolidated debt. When compared to an expected $150 million in adjusted EBITDA for 2016, the company doesn't look very risky.
From afar, TerraForm Global looks a lot like a value stock. But that doesn't tell the full story.
The high-risk yieldco
Operationally, TerraForm Global doesn't look nearly as good as its balance sheet. The company recently said it expects 2016 revenue to be $210 million to $220 million, and net loss to be $65 million to $115 million.
The fact that TerraForm Global is losing money on the income statement isn't necessarily as bad as it appears, because the net income line pulls out non-cash costs like depreciation of assets. But the scale of the loss is concerning given a few other notes.
Most notable is TerraForm Global recently admitting that there's risk it won't be able to continue as a going concern, or business that can survive on its own. Here's the statement that should concern investors:
The risk of substantive consolidation of the Company with SunEdison and inclusion in the SunEdison Bankruptcy, as well as the risk of future covenant defaults under the Revolver and the indenture governing our Senior Notes, raise substantial doubt about the Company's ability to continue as a going concern.
When overlaid with the fact that SunEdison's bankruptcy isn't resolved, and TerraForm Global is still two full quarters behind in filing quarterly reports, there should be concern by investors that there's still a risk the company will go bankrupt. That's what the going concern warning is all about.
On top of all of the operational and financial risks, TerraForm Global owns international renewable energy assets, which come with currency risk. If the dollar rises, which it has done over the past four months, the cash flows coming from projects overseas are worth less in U.S. dollars.
Not the yield investors may be hoping for
Let's presume that all of the risks I've outlined above end up working themselves out, and TerraForm Global emerges as an independent going concern over the next few quarters. Then we should expect that the company will be able to pay a strong dividend yield that compensates investors for taking a risk on the company.
Given the company's estimate that cash available for distribution will be $85 million to $90 million in 2016, we can assume the dividend will yield 10.1% if 85% of CAFD is paid out (an industry standard payout level). That's a solid dividend yield, but it isn't much higher than an 8.4% yield from Pattern Energy, or 7.4% from 8point3 Energy Partners, two yieldcos with much lower risk profiles.
Odds are, 2017 will bring some resolution to TerraForm Global's risks, so I don't think this year will be as bad as 2016. But that doesn't mean this is the best yieldco option for investors today. I would bet on the stable payouts of Pattern Energy or 8point3 Energy Partners over TerraForm Global, which still has a long road ahead in becoming a going concern long term.