Solar's Golden Child Goes Bankrupt
When it comes to winners and losers of the stock market, there’s no grey area — no purgatory, no limbo. Victories and losses are clear and (for the most part) easy to understand.
But then there’s SunEdison (NYSE: SUNE)
If you do a quick search for SunEdison, the results might alarm you.
Over the past twelve months, renewable energy’s golden child has tumbled into penny stock territory.
SunEdison’s stock was trading at more than $30 a share as recently as July 2015, but has been in freefall since then. The stock started 2016 at about $5 a share and closed Monday at $1.90.
Over the last twelve months, shares of the stock have crashed more than 92.14%.
$10 billion in market value… destroyed. Rumors are already circulating that the company will declare bankruptcy sometime this month, and projects in development have already come to a screeching halt.
“We have clear doubts that SunEdison will be able to hit the utility-scale and residential development targets for 2016, and we expect management to lower expectations in the near future.”
SUNE has been hemorrhaging since the middle of 2015, accruing more than $12 billion in debt after making an arguably reckless number of acquisitions. Total losses since 2009 are logged at $3.4 billion.
The company is currently scrambling to sell as many assets as possible, as it tries to build up some cash strength.
“…the biggest corporate implosion in U.S solar history. We’ve seen epic failure at Suntech, Solyndra and the like — but this is in a different league”-GreenTech Media
Earlier this week, SunEdison’s planned acquisition of Vivint Solar (NYSE: VSLR) was abruptly terminated by Vivint itself, citing a “willful breach of the merger agreement” by SunEdison as the reason for pulling out.
Now the company almost certainly faces a lawsuit from Vivint. It’s already being sued by Latin America Power, which it agreed to purchase for $733 million, and it faces millions of dollars in penalties for last month’s cancellation of planned solar projects for Hawaiian Electric.
Oddly enough, shares of SUNE were up 10% almost immediately after the $2.2 billion deal fell apart, despite the company being in complete financial disarray.
Disagreement Abound
It seems like analysts are split down the middle on this one.
Some believe that despite some debt restructuring and legal issues, the stock is still likely to climb. There are a good handful of analysts who believe the market is pricing in a credit event, and that the real value of the company is significantly higher than advertised.
Others like myself wonder how it’s possible for a once-successful company, operating in an incredibly dynamic and high-growth market, to make such a complete financial blunder.
In my opinion, it takes a special level of ineptitude to crash and burn on such a ridiculous scale.
Honestly, how do you mess this up?!
Well, most would tell you that it has to do with the YieldCo structure.
In 2014, SunEdison — like many other renewable firms — established a pair of yieldcos: publicly traded subsidiaries created in order to own finished solar projects.
Think about this in terms of a “spin-off.” Cash-generating projects are lumped together and “spun off” into a separate, publicly traded company. This separates risky projects, like R&D, from finished projects that present little to no risk.
Yieldcos get mixed reviews. Big solar companies are in favor because of tax benefits, reduced risk for investors, increased cash flow, and the protection they offer investors in the face of regulatory changes.
Wall Street, however, does not seem to be a fan.
One independent analyst went as far as to call yieldcos borderline deceptive:
“The key to the yieldco ‘game’ is to convince investors that a capital intensive business is not capital intensive.”
-Kevin Kaiser, Hedgeye
According to Kaiser, “Because dividends — as well as the non-GAAP metrics that yieldcos use to justify them, are discretionary, yieldco boards and managers can essentially choose the financial metric that most investors will value their companies based on.”
SunEdison has not succeeded in reaching GAAP profitability in more than five years, and lost almost $1 billion in the first three quarters of 2015 alone. When SUNE’s stock was at its peak, the company raised debt rather than equity, and that debt load has returned with a vengeance.
I’ve seen lemonade stands run by second graders with more sound financial operations than this, yet the firm was able to convince investors otherwise.
Actually, we can’t even be sure if the released financials are accurate. Earlier this month. SunEdison delayed its 2015 Q4 financial reports, as it was busy resolving two internal investigations into the accuracy of its financial disclosures.
According to the Wall Street Journal, Goldman Sachs, Barclays, CitiGroup, and other banks which intended to loan SUNE the $2.2 billion needed to acquire Vivint, “have balked at providing the loans.”
What does this mean for the solar industry?
Well, it’s always a swift kick to the gut when an industry leader — once the world’s largest developer of renewable energy projects — essentially declares bankruptcy with shares plummeting to near $0.
But, we would urge investors to keep the faith. Don’t let the missteps of a single incompetent firm prevent future profits in the renewables sector.
Solar, in particular, is expected to make huge gains in 2016, growing by an unprecedented 116%.
“The US solar industry had a strong 2015, installing a record 7.2 GW, beating out natural gas capacity additions for the first time ever, supplying 29.5% of all new electric generating capacity. That the same experts who published those numbers are now expecting that number to more than double in 2016 shows just how strong the solar industry in the US is perceived to be.” -Clean Technica
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