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SunEdison - Distressed Debt Situation Obfuscates High Quality Business Model

On Jan. 7, 2016 SunEdison (SUNE), a major solar developer, announced that it will raise very expensive debt.

The markets feared that the Company could not support the new debt load and sent the stock plummeting.

We believe that the company can support the new debt load and we maintain that SunEdison is a strong buy.

You want to be greedy when others are fearful. You want to be fearful when others are greedy. Warren Buffett

On Jan. 7, 2016 SunEdison (NYSE:SUNE), a major solar developer, announced that it will raise very expensive debt. The markets feared that the Company could not support the new debt load and sent the stock plummeting. Currently, the stock is down by more than 50.0% from $6.00 per share to $2.50 a share, which is down more than 90% from its 2015 high of $33.00 per share.

We believe that the company can support the new debt load. Additionally, we maintain that the market still does not accurately understand the company's debt profile and does not properly appreciate the company's earnings power.

We maintain that SunEdison is a strong buy. The company is priced to default; however the company has a pro-forma 2016 debt service coverage ratio of ~2.1x and a pro-forma 2016 net operating leverage ratio of ~2.8x, which implies that the company has a strong investment grade debt profile.

On this note, we will first walk through SunEdison's debt profile and debt servicing requirements. Then, we will walk through SunEdison's earnings power. Lastly, we will compare SunEdison's debt servicing requirements against the company's earnings power and defend that SunEdison has an investment grade debt profile.

SunEdison Debt Profile and Debt Servicing requirements

We believe that the capital markets do not have a fundamental understanding of SunEdison's debt profile and inappropriately believe that default is a real possibility. Most of the capital market participants believe that SunEdison has a whopping $11.7B in funded debt as of 09/30/2015 and is highly levered. One example is shown below.

SunEdison's group credit profile ... reflects a distressed debt "situation"...reflecting our assessment of its "weak" business risk profile and "highly leveraged" financial risk profile. (S&P)

We believe that SunEdison's debt profile is significantly more conservative than what is reported on its GAAP financials. SunEdison consolidates the debt of the following entities onto its balance sheet: TerraForm Power (NASDAQ:TERP), TerraForm Global (NASDAQ:GLBL), project debt, and corporate debt. Due to the consolidation of debt, SunEdison's debt profile is materially overstated. While TERP's debt, GLBL's debt, and project debt are on SunEdison's balance sheet, we do not believe that these credit facilities should be considered SunEdison's debt for the following reasons:

  1. TerraForm Power's debt should not be considered as SunEdison's debt. Firstly, TerraForm Power is its own publicly traded company and TerraForm's creditors do not have recourse to SunEdison. Secondly, TerraForm Power's debt does not finance SunEdison's operations and is used solely to provide a levered yield to TerraForm's shareholders. Thirdly, SunEdison does not have a majority economic interest in TerraForm Power (43.0% ownership of Class A shares), however, is required to consolidate TerraForm Power's debt onto its balance sheet as it maintains a controlling interest in Terra Form Power (91.0% ownership of Class B shares). Please note that Class B shares allow for voting rights but do not represent any economic interest.
  2. TerraForm Global's debt should not be considered as SunEdison's debt. Firstly, TerraForm Global is its own publicly traded company and TerraForm's creditors do not have recourse to SunEdison. Secondly, TerraForm Global's debt do not finance SunEdison's operations and is used solely to provide a levered yield to TerraForm's shareholders. Thirdly, SunEdison currently does not have a majority economic interest in TerraForm Global (35.0% ownership of Class A shares), however, is required to consolidate TerraForm Global's debt onto its balance sheet as it maintains a controlling interest in Terra Form Global through its Class B shares. Please note that Class B shares allow for voting rights but do not represent any economic interest.
  3. Project debt should not be considered as SunEdison's debt. Firstly, Project debt does not stay for long periods of time on SUNE's balance sheet and does not finance SunEdison's operations. As an example: SunEdison develops a $100.0MM solar energy project financed by $20.0MM equity and $80.0MM project debt. SunEdison finishes the project and sells it for $120.0MM, and the buyer of the project assumes $80.0MM in debt and pays SunEdison $40.0MM in cash. Therefore, project debt is only on SUNE's balance sheet only for as long as it is developing the project. Secondly, project debt has no recourse to SunEdison. SunEdison creates special purpose vehicles (SPV) or joint ventures (JV) or variable interest entities (VIE) for a project and the project debt lenders only have recourse to the project's asset and the project's cash flows in the special purpose vehicle.

Peeling away SunEdison's non-recourse debt, we find that SunEdison's true corporate debt is only $3.0 billion versus $11.7 billion as reported on the GAAP financials as of 09/30/2015. SunEdison's $3.0 billion in corporate debt is the sum of the following credit facilities listed in the table below. Additionally, provided below is a list outlining the important features of each portion of SunEdison's debt on the table. This information was obtained from SunEdison's 3Q2015 SEC filings and its business update dated Dec. 24th, 2015.

Source: Author

  1. 2.000%; $300.0 million convertible notes (strike price $14.62; anti-dilutive call spread overlay strike price $18.35) due 2018
  2. 0.250%; $600.0 million convertible notes (strike price $26.87; anti-dilutive call spread overlay strike price $37.21) due 2020
  3. 2.750%; $300.0 million convertible notes (strike price $14.62; anti-dilutive call spread overlay strike price $18.35) due 2021
  4. 2.375%; $460.0...

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