Huge solar projects like this one in Chile only bring value to SunEdison if it survives its current woes. Image source: SunEdison.
The walls are closing in around SunEdison Inc. (SUNE +0.00%) and with hedge funds selling shares at breakneck speed, there's no obvious solution to how to stop the bleeding.
On Tuesday, shares are selling off because recent SEC filings from hedge funds revealed that Third Point, LLC, Greenlight Capital, Lone Pine Capital, Glenview Capital Management, and Omega Advisors all sold stakes in SunEdison during the third quarter. They were among the largest shareholders of the stock, and now that they're jumping ship.
The sell-off has logically spread to SunEdison's yieldcos TerraForm Power (TERP +0.00%) and TerraForm Global (NASDAQ: GLBL), who were intended to buy SunEdison's projects.
Image source: SunEdison.
Why a falling stock price is bad for SunEdison
The backdrop of SunEdison's problem is the company's $11.7 billion of debt, $7.9 billion of which are at the SunEdison level. The rest is consolidated from TerraForm Global or TerraForm Power. Company operations have to eventually be able to refinance or pay off that debt and therein lies the problem.
SunEdison was built to be a development company that would then sell wind and solar projects to its captive yieldcos. The yieldcos would buy projects (at a premium to what the market might pay) and finance them through a combination of new debt and equity, predicated on the idea that the cost of new capital would be lower than the cost of capital of the projects they were buying from SunEdison. This would help the yieldcos grow earnings and dividends, which theoretically would keep the stock price high. In theory, this could go on for many years.
All of this is a great idea but it falls apart once stock prices fall. Today, TerraForm Power and TerraForm Global have implied dividend yields of 12.5% and 16.7%, respectively. It doesn't take a rocket scientist to figure out that yields that high won't facilitate the purchase of any projects from SunEdison that were acquired with cash yields around 9%.
Once the yieldco model is shut off, SunEdison has to turn to warehouse facilities, which have a high cost of capital, and project sales to third parties, which have low margins. Both options leave no profit when you consider the $214 million in total quarterly interest expense SunEdison had last quarter.
What SunEdison has to do
It's becoming clear that SunEdison won't be able to buy Vivint Solar (VSLR +0.00%) at its current stock price. The $2.2 billion acquisition was made in part because TerraForm Power would buy $922 million of projects from Vivint Solar at a cash on cash yield of 9.5%. Now that's unlikely to happen. Without that capital, it's unlikely SunEdison could afford the $9.89 per share in cash it's supposed to pay for Vivint.
The $2 billion acquisition of Invenergy is also not likely to happen. The company's project portfolio was bought at a levered cash on cash yield of 8.4%, so there's really nowhere for those assets to go right now.
It's uncertain how these acquisitions will unravel, but I don't see how they get completed at today's prices.
SunEdison may be a bankruptcy candidate
With its business model falling apart, SunEdison needs a savior to finance both projects and its future operations. But that's not going to come from hedge funds that are abandoning the company or yieldcos that now have such high yields that they can't buy projects.
The next thing to look at is debt maturities, which could cause the company's bankruptcy. SunEdison's $410 million margin loan that matures on Jan. 29, 2017 will be the first major date to look at. The company could probably make it through 2016 if it doesn't burn too much cash (which is possible) but it will have a hard time refinancing debt if today's market conditions continue.
Unless there's a huge turnaround in SunEdison's stock price and a reduction in debt, I don't see how the company can survive long term.
