TerraForm Power Inc (NASDAQ:TERP) has been through a lot in the past two years. It survived the bankruptcy of its sponsor, SunEdison, and after months of uncertainty, Brookfield Asset Management (NYSE:BAM) has agreed to take a controlling stake in the company.
The future doesn't contain a lot of certainties for TerraForm Power, but there are a few reasons its stock could rise.
Confidence rises once again
The most likely way TerraForm Power's stock could rise comes down to earning the market's confidence. The most important, and most fickle, strength a yieldco can have is the market's confidence.
NextEra Energy Partners (NYSE:NEP) and 8point3 Energy Partners (NASDAQ:CAFD) serve as examples of how different levels of market confidence influence the price and dividend yield of a yieldco. The market doesn't think 8point3 Energy Partners can grow its dividend by double digits beyond 2017, which is likely true given the fact that its sponsors don't currently plan to have enough projects to drop down long-term. NextEra Energy Partners, on the other hand, has put together a plan to grow its dividend by double digits beyond 2020, resulting in the lower dividend yield you see below.
However, a low dividend yield allows a yieldco to issue shares to buy projects that will be accretive to the dividend, allowing more dividend growth. In a sense, the yield creates a bit of a self-fulfilling prophecy. TerraForm Power hopes to get on the market's good side and become a growth stock again, which would lead to a rising stock if the market buys the story.
Brookfield extracts unlocked value
We don't currently know what Brookfield is going to do with TerraForm Power when it takes control. It could refinance debt to lower interest rates, use its own backing to buy growth projects, or even sell off assets it doesn't see as core to reduce debt.
At the end of 2016, TerraForm Power reported a weighted average interest rate of 5.82% on $4 billion in debt. That's not a terrible interest rate, but it's not very competitive with those of other yieldcos. NextEra Energy Partners has $3.8 billion in debt in all, but $1.4 billion of it is financed with debt holding an interest rate of between 2% and 3%. Directly comparable revolving credit facilities had interest rates of 3.92% at TerraForm Power and 2.73% at NextEra Energy Partners. Brookfield may be able to lower the interest rates on debt significantly.
Brookfield has also indicated that it wants to get TerraForm Power back to growth. It's committed $500 million to acquisition financing and has a 3.5-gigawatt portfolio of projects for which TerraForm Power has the right of first offer. That's a start in becoming a growth yieldco again.
Another adequate strategy could be to sell off assets and shrink the size of the yieldco. This may be the quickest way to unlock value, although it would leave the company in an uncertain position in the long term.
No matter what it chooses to do, Brookfield can likely unlock more value in TerraForm Power than the company could have by itself.
Reason to be cautiously optimistic
It's possible that Brookfield will be able to right the ship and get TerraForm Power back to growth, giving the market confidence needed to lower the dividend yield. And that would lead to a big rise in the stock. But it's not a guaranteed outcome -- we've seen some yieldcos flounder with high dividends, something that's very difficult to recover from. Optimism is justified, but so is some caution, until we know how confident the market will be with TerraForm Power in the long run.