Image source: SunEdison.
TerraForm Global Inc (NASDAQ: GLBL) should be about as safe an energy company as you can get these days. The company owns renewable energy assets around the globe and pays a dividend based on these contracted cash flows.
But the stock has fallen 86% in the past year and now sports a whopping dividend yield of over 42.8%, indicating that investors aren't expecting that payout to last for long. So, why does this stock appear to be so much riskier than it should be?
TerraForm Global isn't quite what it appears
The problems at TerraForm Global go back to its relationship with SunEdison (NYSE: SUNE). The parent company is supposed to be a feeder for TerraForm Global, which would buy projects around the world with low cost capital (that it no longer has) and then pay out an increasing dividend to shareholders and SunEdison itself.
But the relationship has been strained by SunEdison's domination of TerraForm Global's board of directors and its need for cash. In late 2015, SunEdison dropped 425 megawatts of unfinished projects in India to TerraForm Global for $231 million in cash it desperately needed. The remainder will be paid as projects are completed, but a yieldco buying unfinished projects like that goes against the cash flow-centric nature of the supposed business model. It simply shouldn't be taking on the risks inherent with being a developer.
There are other risks that go with the territory, like currency risk and interest rate risk. But TerraForm Global is in trouble because of SunEdison.
Image source: SunEdison.
The risk isn't with TerraForm Global
If it weren't for SunEdison, TerraForm Global should have a bright future as a dividend stock. But the company is still tied to its parent and that could have negative consequences down the road. The most immediate risk is it hasn't filed 2015 financial statements, updating investors as to its financial condition.
The problem isn't that TerraForm Global doesn't have projects that are generating revenue, it's that it relies on SunEdison for back end systems. So, if there's a problem with SunEdison's accounting, as SEC filings have indicated, it could affect TerraForm Global too.
There's also the risk of default, something the market already appears to be pricing in. Moody's Vice President Swami Venkataraman said this when the company downgraded TerraForm Global's debt:
"In our opinion, both TERP and GLBL exhibit stronger credit quality than parent SUNE because their cash flows remain stable. However, our rating incorporates a low but not negligible probability that one or both yieldcos may eventually end up in bankruptcy proceedings as a result of a SUNE bankruptcy."
The word "bankruptcy" associated with any company is troubling and that's a big reason the stock has fallen as far as it has. The problem is that we might not know how bad SunEdison or TerraForm Global's financial position is until the 2015 annual report is released, and who knows when that will happen?
One risk that came front and center is the project and debt default risk associated with SunEdison. TerraForm Global said that three power plants in India, which I mentioned above, have the right to accelerate debt maturity if SunEdison defaults. Power plants in South Africa can trigger a default on power purchase agreements if TerraForm Global is deemed to go through a "change of control," which could happen in the case of a SunEdison bankruptcy.
All of this risk goes back to SunEdison, but it can't be ignored.
Not a stock for the faint hearted
Where there should be a solid business, it's hard to see anything but risk at TerraForm Global. SunEdison's bankruptcy could bring the company crashing down and it's already prepayed for projects that SunEdison may not ever complete.
While the opportunity looks enticing, there's nothing safe about TerraForm Global today and unless we get assurances the company will be able to pull out of its downward spiral I wouldn't get anywhere near this stock.
