What: Shares of renewable energy developer SunEdison (OTC:SUNE.Q) plunged 21% as of 11:30 a.m. on Wall Street after the company announced a new debt exchange.
So what: SunEdison announced a series of complex exchanges that are intended to reduce debt on the balance sheet. The cost is an incredible dilution to existing investors and a new high-cost loan. Here are the important details.
- SunEdison is offering a new $725 million second lien secured term loan at an interest rate of LIBOR plus 10% that will be used to pay down about $170 million existing on a second lien credit facility. As part of the transaction, the loans will also come with 28.7 million shares worth of warrants.
- $580 million of notes will also be exchanged for a $225 million convertible note due 2018 and 28.0 million common shares.
- 11.8 million common shares are being exchanged for $158.3 million in preferred stock.
As part of the announcement, SunEdison said the exchange rate may change before the transaction's expected close on Jan. 11, 2016. So, the offer could be even more dilutive than it is currently.
Now what: LIBOR plus 10% is an insanely high interest rate for a renewable energy developer, especially considering that SunEdison has been buying projects that paid less than 10% in cash yields (full IRR would be significantly lower and wasn't disclosed).
A dilutive offering was definitely necessary for SunEdison to reduce debt, but the cost was much higher than investors expected. According to Bloomberg, analyst Sven Eenmaa at Stifel Financial Corp. estimated that the deal would add $40 million in interest expense for the company and dilute shareholders by 18%.
I don't see any positives from this and SunEdison may have fallen down a hole so deep it can never get out. It won't be able to build projects with debt costs over 10%, and that's the biggest reason investors should avoid this stock for better renewable energy stocks for the foreseeable future.