This is the sixth in a series of articles regarding SunEdison (SUNE), the Vivint Solar (NYSE:VSLR) acquisition, and Terraform Power's (NASDAQ:TERP) Portfolio Asset purchase obligations. This is an extremely complex merger situation with a high degree of risk and uncertainty. A review of the three most recent articles will help in understanding the Appaloosa Case and SUNE's potentially precarious financial position if an enjoinder is granted.
- SunEdison, Vivint Solar, and Blackstone: All 3 May Be Better Off...
- SunEdison: Read through from Solar City...
- SunEdision: Valuation of the Vivint Solar Residential Portfolio...
It is also important to read two recent articles written by Aurelien Windenberger:
- Yet Another Piece of Bad News for SunEdison...
- TerraForm Power: Focusing on the Potential Benefits...
With that as a background, let's dive into recent events and examine the February 16th hearing in the Appaloosa Case and how they may impact SUNE, TERP and VSLR.
The February 16th hearing on the Appaloosa Case resulted in the judge taking the case under advisement. This simply means that the judge will opine on Appaloosa's request for an enjoinder at a later date after he has had time to consider the oral arguments and briefs submitted by the plaintiffs and defendants. Here is a summary of some of the interesting points that arose during the hearing based on a research report by Goldman Sachs, who had an observer in attendance at the hearing, and several news articles.
- SUNE indicated that the VSLR deal will not close before March 9. Frankly, this is a bit of a surprise given the VSLR shareholder vote on February 26th. This date may reflect the complexity of the highly structured financings that SUNE is trying to nurse across the finish line to complete the VSLR acquisition and that even with a denial of the enjoinder it may struggle to close the deal. It also provides an outside marker for estimating when the judge will opine on the enjoinder request, i.e. we may not see a ruling this week.
- Both SUNE and Appaloosa stated that there is no deal for the Portfolio Assets. Both stated that bids did not progress due to the Appaloosa Case. I would add that any potential buyer has to be concerned about the financial viability of SUNE if Appaloosa wins the enjoinder (see Recent Events paragraph below) or wins the Appaloosa Case at a later date if the enjoinder is not granted.
- Neither side presented arguments regarding the fairness of the $800 million acquisition price for the 470 MWs of Portfolio Assets. This is not a surprise because the focus of the briefs and oral arguments by both sides was whether the plaintiff's request for an enjoinder met the three standards necessary for one to be rewarded (see below). It also suggests however that if the enjoinder is denied and the Appaloosa Case continues, the ability to sell the assets to a third party will be quite limited.
- The take or pay agreement between TERP and SUNE ("Take or Pay Agreement") is a condition precedent for the provision of the $300 million Term Facility. This is where things could become quite messy. If the judge grants an enjoinder, the SUNE financial house of cards will collapse, but what happens if the enjoinder is denied but the Appaloosa Case moves forward and the court grants a rescission of the Take or Pay Agreement? Would the Term Facility become immediately payable? The Term Facility is secured and guaranteed by the SUNE entities that will hold the Portfolio Assets and by the SUNE wholly-owned subsidiary that will own the indirect subsidiary that will be the borrower under the Term Facility (i.e. it is not guaranteed by other SUNE entities or by SUNE) but if a payment default occurs under the Term Facility due to a rescission of the Take or Pay Agreement, will it trigger a cross default under the indentures for SUNE and other SUNE entities that are not guarantors of the Term Facility?
The Definitive Proxy Agreement for the VSLR Shareholder vote states that
"The funding of the Term Facility is subject to customary conditions, including the negotiation of definitive documentation and other customary closing conditions."
Can SUNE provide the necessary reps and warranties required to complete the definitive documentation if the Appaloosa Case is ongoing? Even if the enjoinder is denied, the Term Facility may not close and SUNE would then not have sufficient financing to close the VSLR acquisition. This is probably the most important take-away from the hearing. Just because an enjoinder may be denied does not mean that SUNE is in the clear and will be able to seamlessly close the Vivint Acquisition. All of this begs the central question of my last article, are all parties better off negotiating a termination agreement? Ultimately Blackstone will determine the answer to this question through their actions and we will learn the answer to the question on or near March 9th.
Standards for a Temporary Injunction (Enjoinder)
There are three standards that are used to measure whether a request for an enjoinder should be granted in the Delaware Chancery Court. It is up to the judge to determine the proper weight of each standard in arriving at a decision based on the particulars of the case.
- The movant has demonstrated a reasonable probability that he or she will ultimately be successful after a final hearing on the merits. This relates to issues of law as well as issues of fact.
- The presence of imminent, irreparable injury. An injury will be considered irreparable if there is interference with a legal right which cannot be adequately compensated for by an award of damages. It is not necessary that the injury be beyond the possibility of repair by money compensation, but it must be of such a nature that no fair and reasonable redress may be had in a court of law and that to deny the requested relief would be a denial of justice.
- The "balancing of the equities." The court must balance the injury to be prevented by granting the interim relief against the potential hardship to the party sought to be enjoined and, where relevant, to the public interest. A court will not issue a preliminary injunction or a temporary restraining order when to do so would threaten the party sought to be enjoined with irreparable injury that, in the circumstances, seems greater than the injury that the movant seeks to prevent.
To emphasize again, the judge will not be deciding the merits of the case, though he may touch upon it in his decision to grant or deny the enjoinder since he had to assess its probability of success under the first standard. If he questions the probability of success, that does not mean the plaintiffs will abandon the case. The third standard would appear to be the biggest hurdle facing Appaloosa.
Recent events point to increasing financial distress at SUNE as it aggressively manages its cash flow and these events point to the importance of closing or negotiating a termination of the VSLR Acquisition. They also suggest a potential unraveling of part of the first debt for equity and assets swap agreement.
- Inability to close the Globeleq Mesoamerica Energia, Solarpack, BioTherm transactions [impacts TerraForm Global (NASDAQ:GLBL)].
- No commercial operation announcements for four projects that were scheduled to enter operations during the first quarter and to be dropped down to GLBL.
- No commercial operations announcements on the first Indian portfolio projects prepaid by GLBL and due to enter operation during February.
- Inability to close the JV agreement for the Mount Signal 2 and 3 projects, which will negatively impact cash flow for the first quarter.
- Hawaiian Electric termination of PPAs due to missed development milestones and, more importantly, Hawaiian Electric's concerns over the negative impact a SUNE bankruptcy would have on its ability to allocate transmission rights to other projects.
- No announcements by SUNE regarding upcoming preferred stock dividend payments.
Several SA readers have queried in posts why a strategic buyer does not step forward and purchase SUNE, since its current equity market value, using the fully diluted shares outstanding from SUNE January 13th Dilution Overview, would be a bit over $600 million. The due diligence process for a strategic acquirer would take at least a month to complete and, even if a deal could be negotiated, it would potentially take several months to close. This may be too late for SUNE. In addition, SUNE management does not have the bandwidth to run a sale process while it is juggling the VSLR Acquisition, all the related financings, the Appaloosa Case, and the financings needed to commence construction on its back log of projects.
The most important issue regarding a potential acquisition by a strategic buyer however is the 101 change in control put language in all the convertible debt indentures. Any potential acquirer would need to refinance approximately $3.5 billion of convertible debt that would be put back to the company at 101 of par, since the various tranches of convertible debt are currently trading at significant discounts to par. Any strategic acquirer is better off being a stalking horse in a bankruptcy process and negotiating with the convertible debt holders as a class to pay significantly less than par (and pay very little to the existing equity).
Other than for the most risk tolerant of investors, SUNE remains uninvestable until there is a ruling on the request for an enjoinder in the Appaloosa Case. This applies not only to longs but shorts. A denial of enjoinder could be a "widowmaker" for investors shorting the stock or convertible bonds. If the enjoinder is denied, it may still not be possible for SUNE to close the VSLR acquisition if the ongoing Appaloosa Case interferes with closing the Term Facility.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SUNE, TERP, GLBL over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.