All indications are that SunEdison Inc (OTC:SUNEQ) is on the brink of bankruptcy. The stock has fallen well below $1, multiple government agencies are investigating the company, executives are fleeing, and one of its subsidiaries explicitly stated that there is "substantial risk that SunEdison will soon seek bankruptcy protection."
If the self proclaimed largest renewable energy developer in the world ends up going under, what happens to all of those assets? The answer may be more complicated than you might think.
SunEdison's bankruptcy would be different
Most bankruptcy reorganizations involve debt holders trading debt for equity in a new company, leaving the company with new owners and a less burdensome debt load. The operations of the business itself may not even notice a bankruptcy restructuring.
But SunEdison as it's currently constructed doesn't really make sense as a going concern. It has a mix of development pipeline, operating assets, long-term operating & maintenance contracts, and even assets in other companies. Keeping all of these assets together may not make any sense.
I think there will be a combination of a liquidation and restructuring of SunEdison's assets. Here's what to keep an eye on.
Assets will go somewhere
Let's start with the known assets in the portfolio. SunEdison owns 48.2 million shares of TerraForm Power (NASDAQ:TERP) and 63.3 million shares of TerraForm Global (NASDAQ:GLBL) along with the incentive distribution rights of both companies. In the case of bankruptcy, those assets will go somewhere. It's possible they'll be given to debtors as compensation, but someone will own them, whether it's SunEdison or not. I think shares will be sold off, but the O&M contracts may stay with SunEdison.
As of Sept. 30, 2015, the last time the company reported earnings, SunEdison had 2,884 megawatts of renewable energy projects under construction with $537.4 million of equity invested and $328.7 million of debt funding these projects. These projects are worth something and they could be sold or folded into a SunEdison emerging from bankruptcy. Remember that third party sales became the company's strategy late in 2015, so selling these projects wouldn't be all that unusual.
The more uncertain assets are a six gigawatt pipeline of solar projects and a 1.9 gigawatt pipeline of wind projects worldwide. Even a signed power purchase agreement could be sold to another developer, but for over a year, reports have been that SunEdison was bidding extremely aggressively to build its pipeline. If contracts aren't lucrative enough for competitors to buy they might just be cancelled. In any event, it's unlikely a SunEdison emerging from bankruptcy would be able to fund these new developments itself.
Operations and maintenance are a conundrum in bankruptcy
According to SunEdison, in 2016 the company will generate $443 million of revenue and $223 million of EBITDA from services for renewable energy projects. These are primarily service contracts with projects it has built and sold or dropped down to yieldcos.
That number may need to be taken with a grain of salt, given the fallout of bankruptcy, but there's work that needs to be done and value for whoever owns the O&M business. It's this core business that I think the new SunEdison will emerge as. It could be a small project developer and an O&M company and quietly run a very profitable business.
Is a solar development company worth anything?
Here's the biggest question in a potential SunEdison bankruptcy: What is the renewable energy development business worth?
In theory, developing renewable energy projects should drive everything from the O&M business to yieldcos. But developing projects requires a lot of money, including debt, which SunEdison has found out the hard way. If that funding dries up, so does the business.
If debtholders are willing to keep the business intact, they could keep the development business and some of the pipeline as is, but I'm not sure that's something debt holders will want to take on in a highly competitive market. Most renewable energy developers are now attached to either solar or wind companies or utilities. So, why should this one be a stand-alone company?
It could be that SunEdison's development business and pipeline is packaged together and sold to a company like Canadian Solar or NextEra Energy, who are trying to expand their development pipelines. But we don't know what the market would be for such a company or whether debt holders would want to sell it. In bankruptcy, that might be the biggest debate.
Don't expect an easy bankruptcy battle
There's certainly value within SunEdison, but there will be a long battle over the company's assets. Pieces with certain value will likely be sold off with more uncertain value generators, like the development business, may emerge under the SunEdison umbrella once again. I just wouldn't expect this to remain the world's biggest renewable energy developer because that strategy has fallen flat in a big way.