There's now more certainty for TerraForm Power (TERP) than the company has had in more than a year and a half. SunEdison's days as the company's sponsor are numbered, and Brookfield Asset Management (BN -1.10%) will soon take over as the sponsor and biggest shareholder.
As we move toward Brookfield's takeover of the company, there are a few things investors still may not know about the yieldco.
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Investors may not get the value they expect
Shares are trading above the $11.46-per-share cash offer, so it's likely the buyout will be at or near the full prorated cash-and-share offer. That means $6.44 per share in cash and 0.53 shares in new TerraForm Power shares. The net value of shares held will be $6.44 per current share.
What investors may not know is that the shares they currently hold are worth about half cash and half shares in the new yieldco.
We don't know what the long-term dividend will be
TerraForm Power's most recent projections show that cash available for distribution (CAFD) in 2017 will be $120 million to $160 million. After the Brookfield buyout is complete, there will be 158 million shares outstanding, meaning an 85% payout ratio of CAFD would be $0.65 per share in potential dividends. That would be over a 10% implied dividend yield given the value of shares I outlined above. And that high a yield may mean it'll be tough to buy additional projects and grow the dividend in the future.
Of course, CAFD and the payout of the dividend could be different depending on what Brookfield wants to do with the yieldco. Part of the thesis from Brookfield is that it can extract more value long-term than SunEdison could. That could involve keeping more money to pay down debt or using retained earnings to grow organically instead of through issuing shares like yieldcos originally planned to do. There's just too much uncertainty to predict where the dividend will end up.
There are still debt uncertainties
Due to SunEdison's bankruptcy, there are defaults on some of TerraForm Power's project-level debt, which has meant $57 million in cash is currently restricted. But with Brookfield taking over sponsorship and $542 million in cash on the balance sheet, there may be some opportunities to reduce debt costs long-term.
What's changed with Brookfield onboard is debt moving from a big risk to becoming a potential opportunity. Long-term debt currently carries an interest rate of 5.81%, with senior notes as high as 6.63%, so if Brookfield can bring stability that leads to lower borrowing costs, it could be a big positive for TerraForm Power.
But before we get there, keep in mind that Brookfield's buyout will likely split current shares into about half cash and half shares. So, the upside in the company is only on a portion of shares' value.
