By Parke Shall
Banks won't back the Vivint buyout. Does this mean imminent bankruptcy or finally some much needed liquidity?
For months, SunEdison (NYSE:SUNE) investors have dreamed about getting out of the Vivint Solar acquisition. It would clearly mean more liquidity for a company that is struggling mightily with its debt load, and it would give SUNE and its associated companies room to breathe.
Also for months, investors have been speculating as to whether or not SUNE is going to have adequate liquidity to continue as a company or whether the company is past the point of no return.
As we've said in the past, SunEdison's demise has had some unintended consequences. Now that the stock is valued almost just in the pennies, it has become a haven for daytraders and momentum traders looking to make a quick buck due to the extreme volatility we have seen in SUNE shares. It is not uncommon for the stock to rise or fall 20% or 30% in a day nowadays, while the underlying narrative focused around liquidity continues to play out for those who are both long and short for the long term.
Today it whipped up 25% and after hours it is selling off on the news du jour. Dow Jones reported today,
Banks told SunEdison (NYSE: SUNE) that they won't fund the loan for its takeover of Vivint Solar (NYSE: VSLR) after the company delayed filing its annual financial statements, according to Dow Jones, citing sources on the headlines.
This comes after a long line of headlines this past week, including Appaloosa's failure to get a court to order an injunction against the company and the company delaying its 10-K to investigate its liquidity scenario. We drew the conclusion in our article earlier this week that the company's liquidity position may be worse than originally thought:
Aside from the obvious, that the company's liquidity position may be worse than they have led on, one also has to consider whether or not information used to obtain deals from private equity in the past could have potentially been done on false information.
If this is the case, it could render past lifelines that the company has received over the last year null and void. This would put the company almost instantly into a crisis mode, where they would have to immediately swap debt for equity at very low prices or go down other roads that result in toxic results for common shareholders.
We understand that solar could perhaps be in the beginning of a very long-term bull market. But that in and of itself is not a reason to recklessly invest in SunEdison while a potentially enormous liability like this hangs over the head of the company and perhaps holds the company's future in its balance. We would not want to be SunEdison shareholders after the shocker released yesterday.
Today's news leaves investors scratching their head over this scenario.
1. Is this a great development that will allow SUNE to legally not acquire Vivint and free up the liquidity it needs badly? Surely this would be fantastic news.
2. Are banks not lending because bankruptcy risk may be imminent on SUNE's part, especially while the audit investigation is up in the air?
Unfortunately, the risk/reward in this situation is still too skewed to the downside for us to see the potential good in this scenario. The likelihood that this idea was concocted by SUNE in order to perhaps walk away from this deal seems too smart and crafty for a management team that has been, to put it bluntly, incompetent.
Banks likely are sensing serious counterparty risk with the transaction and SUNE could honestly be in a spot where they have no more access to capital and no more lifelines to tap. While this deal not going through may buy the company a small amount of time, banks' unwillingness to lend plays into the narrative that high yield could be in a bubble.
In terms of options for financing itself, SUNE would be left with toxic dilutive equity options.
We don't see a scenario where we would want to own SUNE on the back of this news, and we'll continue to watch for updates.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.