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The Biggest Problem With TerraForm Global, Inc. Stock

By Travis Hoium - Apr 1, 2016 at 6:45PM

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Once a seemingly stable yieldco, there are some major problems in TerraForm Global's future.

Image source: SunEdison.

There are a lot of problems facing an international renewable energy company these days. For starters, a strong dollar is making each dollar earned overseas look smaller, energy policy in many countries isn't stable, and emerging economies often come with interest rates much higher than what we see here in the U.S.

But TerraForm Global Inc (NASDAQ: GLBL) has plunged 83% from its 52-week high and now yields an incredible 44% from its dividend, so the problems facing the company are more than business as usual. This kind of stock performance is usually associated with companies expected to cut their dividend, or even go out of business, which is a problem facing TerraForm Global.

What's going wrong at TerraForm Global
One of the big problems TerraForm Global has faced in the past year is a loss of confidence in its finances. The company is a creation of SunEdison (SUNEQ), which has dubbed itself the largest renewable energy developer in the world, and is intended to own renewable projects with long-term contracts in emerging countries.

But TerraForm Global reported just $29.4 million of revenue and an $82.9 million loss in the third quarter of 2015, the last time it reported earnings. At the same time, it announced $24 million in cash available for distribution to shareholders, so it's spending cash it didn't have to pay dividends.  

Since then, the company spent $231 million on projects in India it bought from SunEdison that aren't even operational. This was part of an effort by SunEdison to shore up its balance sheet, but it was to the detriment of TerraForm Global long-term.

According to a recent SEC filing, debt maturities on three power plants in India could be accelerated if there's a change of control of TerraForm Global, which could happen if SunEdison goes bankrupt. 

On top of all of this, TerraForm Global relies on SunEdison for operational services, which means it has delayed its annual filing because SunEdison doesn't have its internal controls figured out yet. And that brings us to the biggest problem for TerraForm Global.

The tangle with SunEdison
If it's not apparent by now, the biggest problem for TerraForm Global is its ties to sponsor SunEdison. If SunEdison's bankruptcy could lead to a cascade of consequences that lead to bankruptcy at a seemingly stable company like TerraForm Global, what else could be more concerning?

The challenge for investors right now is that we don't know what the fallout of SunEdison's likely bankruptcy is for TerraForm Global. It could free the company to operate more independently, especially after CEO Brian Wuebbels (formerly SunEdison's CFO) stepped down. But we don't know what the company's financial position looks like past September 30, 2015, and of course, that's because of its ties to SunEdison.

All of this uncertainty has led to the fall in TerraForm Global's shares that we've seen over the past six months. But it's the reaction by debtors and energy customers to any bankruptcy that will decide the company's future. If management can negotiate enough financial leeway to wiggle out of its current mess, the stock could be a big gainer. But the likelihood it'll be pulled into bankruptcy along with SunEdison is probably just as high. And that's the problem for the stock today.

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