Image: SunEdison.
Shares of SunEdison Inc (SUNE +0.00%) have been pummeled on the market over the past year, falling 87% and well over 90% from its highs. Sometimes drops like that can lead to incredible rebounds and sometimes they're a sign of worse things to come. Only time will tell. If you're considering buying shares of SunEdison Inc hoping for such a rebound, here are five things you need to know.
1. Losses continue to pile up: In the past twelve months, SunEdison has reported a net loss of $1.16 billion, including losses in every single quarter. As a result, management is slashing expenses in an effort to reach cash flow breakeven by the end of the year. Success executing on that strategy could determine the company's future.
2. Debt is a big problem: SunEdison's debt load was $11.7 billion at the end of the third quarter of 2015, including $7.9 billion at the parent company. That debt is the biggest concern investors have right now and management needs to reduce debt drastically to stay solvent. An exchange of convertible debt for a combination of new debt and shares of stock reduced debt by $738 million earlier this month and other transactions should mean a lower debt load early in 2016. But be warned, new debt comes with very high interest costs...
3. Interest rates are high - like really high: The exchange that reduced SUNE's debt load recently was a blessing on the surface, but when you dig into it the deal starts to look a lot less attractive. The issuance totaled $725 million in new term loans carrying an interest rate of LIBOR + 10% with a minimum rate of 11% - which is incredibly high in today's market. Competitors are borrowing money at LIBOR plus 3.5% - 4.5%, but 10%?
The debt load highlighted in #2 is something investors need to keep an eye on, but the rate of interest on that debt may be even more important. If SunEdison's borrowing costs are higher than competitors it'll be hard to win project bids and stay competitive long-term.
4. Yieldcos have yields in double digits: A year ago, most of SunEdison's value was based on the idea that it could build projects and then drop them down to its yieldcos TerraForm Power and TerraForm Global for the foreseeable future. The yieldcos had a low cost of capital, so they could pay premium prices to SunEdison and the parent company would continue to get cash flows from dividends and incentive distribution rights. It was a win, win strategy.
That strategy has fallen apart since yieldcos began to drop and both yieldcos now have yields in double digits. They're basically unable to buy new projects because of their own high capital costs and that's why SunEdison has transitioned to selling projects to third parties. The year ahead will tell us if that's a profitable strategy or not.
5. The O&M business is SunEdison's bright spot: We don't quite know what profitability will look like from either dropdowns to yieldcos or third party sales in the future, but we do know what the operating and maintenance business should look like.
When SunEdison builds projects and sells them it includes an O&M contract to keep those plants running at peak conditions. In 2016, management is expecting that business alone to generate $443 million in revenue and $223 million in EBITDA.
Needless to say, that's a pretty nice business to be in with very little risk at a time when SunEdison needs all the stable cash flow it can get.
