If you follow renewable energy closely, the SunEdison Inc. (NASDAQOTH: SUNEQ) bankruptcy wasn't all that surprising when it happened. The writing was on the wall for months, driven by the market's complete lack of confidence in management's ability to execute any strategic plan, which happens to be very important when your business is built on financing billions of dollars in projects.
But now that SunEdison is bankrupt, it leaves its yieldcos, TerraForm Power (NASDAQ:TERP) and TerraForm Global (NASDAQ: GLBL), in a precarious position. They aren't exactly part of SunEdison because they're publicly traded, but they're still tied to the company's fate, and that could be a big problem.
The tie between SunEdison and its yieldcos
Technically, SunEdison's bankruptcy wouldn't lead directly to bankruptcy by TerraForm Power or TerraForm Global. Instead, it may lead to cross-defaults on debt both companies have used to buy projects. According to Moody's analyst Swami Venkataraman, 10 of TerraForm Power and five of TerraForm Global's financing deals have clauses that are tied to SunEdison's health. So, SunEdison's bankruptcy could technically cause a default.
But both yieldcos are operating assets that generate cash and they should be able to negotiate a solution with creditors. This would likely involve waivers on covenants or a negotiated settlement. That may involve a higher interest rate on debt or cash reserves held at the project level. And that's where there could be a yet to be determined impact on both TerraForm Power and TerraForm Global.
What is the fallout for the TerraForms?
Even if TerraForm Power and TerraForm Global avoid bankruptcy, they may not be the same cash-generating machines they are today. If the cross-defaults on debt lead to cash being moved from cash available for distribution to reserves or higher interest payments, for example, it would mean a lower dividend. And it looks like that's already what the market is betting on.
TerraForm Power's dividend yield of 15.8% is incredibly high in any market condition, and TerraForm Global's dividend yield of 42.1% is almost unimaginable. The likely fallout, though, from SunEdison's bankruptcy will be that the companies will have to give something to creditors and that probably means a much lower dividend in the future. So don't bet on these stocks just for their current dividends, because they probably won't last.
One complication that may matter
Because of the way SunEdison structured the yieldcos, it still remains a key cog in their future success. In most cases, it's actually the one operating projects and it provides other back-office services for the yieldcos. That's actually why neither has filed their 10-Ks for 2015.
This is another complicating matter that debt holders may want to iron out before giving any concessions to the yieldcos. After all, why should a company that went bankrupt under the weight of its own growth ambitions be able to control what should be a couple of fairly stable companies?