As detailed in the table below, SunEdison (NYSE:SUNE) has very little discretionary cash available for operations during 1Q 2016 due to the constraints imposed upon it by the LC Facility. It is also facing the possibility of a Consolidated Leverage Ratio Covenant default for the quarter ended March 31, 2016.
|Q1 2016 Sources & Uses|
|Cash @ 12/31/15||$619|
|Net Proceeds from 2nd Lien Credit Agreement||$607|
|Existing 2nd Lien Repayment||$169|
|Margin Loan Repayment||$5|
|Liquidity Amount per LC Facility (restricted cash)||$500|
|Renova Put Payment||$91|
|GLBL India Project Prepayment||$231|
|LAP Termination Payment||$28|
|Severance/Restructuring Cash Costs||$20|
|GLBL Interest Support Payment||$20|
|Cash Available for Operations||$162|
|Cash Interest Expense||$(92)|
|Cash Available for Investment||$120|
The figures in the above table are mostly sourced from SUNE's January 7, 2016 Transaction Summary for the Second Lien Financing and Debt for Equity Exchange (primarily page 7) and the January 7th Business Update (pages 11, 13 and 15). The following bullet points provide additional detail:
- Liquidity Amount per LC Facility (detailed in this article).
- GLBL India Project Prepayment (page 15 Business Update use of funds in cash flow statement).
- Latin American Power termination payment (press release).
- Renova Put Payment (detailed in this article).
- Estimated EBITDA (page 11 of Business Update plus a Morningsidepark assumption that no project sales are completed for 1Q). A generous estimate when compared to the Business Update estimate of a 4Q 2015 EBITDA loss of $95 million.
As illustrated by the table, SUNE is suffering from severe liquidity constraints and it has negatively impacted its project development business.
Another Potential Covenant Default
Since SUNE has not been able to complete and file its 10-K with the SEC, it is now also flirting with a Financial Statement Covenant default as detailed in Section 6.01(a) of the LC Facility and Second Lien Credit Agreement and Section 5.04 of the Convertible Senior Notes Indenture. SUNE will default under these various indentures on March 30th and there is no cure period under the LC Credit Facility and Second Lien Credit Agreement. Either of the Lenders representing 50% of the Term Loans (i.e., the lenders for Tranches A1 and A2) under the Second Lien Credit Agreement or the Banks representing 50% of the Commitments under the LC Facility can request an acceleration of the outstanding amounts under their respective credit agreements and trigger a cross default.
The LC Facility banks have significantly more collateral protection than the Second Lien Credit Agreement Lenders so the latter are more likely to take action. It is possible that SUNE can negotiate a forbearance agreement but it has almost nothing to negotiate with at this point. It has little or no spare liquidity to offer the LC Facility and Second Lien Creditors as a prepayment or for cash collateralization of their loans. Using spare liquidity in this manner would also serve to only exacerbate the slowdown in project development further. SUNE could be forced to issue more below market price warrants that are immediately exerciseable as a means of buying more time, but even that avenue would be limited due to the NASDAQ 20% rule and it likely would only buy them a limited amount of time until the next default.
NYSE 20% Rule
"NYSE Rule 312.03(c) requires shareholder approval prior to the issuance of common stock, or securities convertible into or exercisable for common stock, if (1) the common stock has, or will have upon issuance, voting power equal to or in excess of 20% of the voting power outstanding before the issuance of such stock; or (2) the number of shares of common stock to be issued is, or will be upon issuance, equal to or in excess of 20% of the number of shares of common stock outstanding before the transaction. "Voting power outstanding" refers to the aggregate number of votes that may be cast by holders of those securities outstanding that entitle the holders thereof to vote generally on all matters submitted to the issuer's securityholders for a vote." (Lloyd L. Harmetz, partner at Morrison and Foester).
Getting shareholder approval for more than a 20% issuance would be time consuming, particularly in light of the accounting issues that would have triggered the potential default in the first place. At a market value of approximately $800 million based on 400 million shares outstanding and a $2 stock price, SUNE would be able to issue warrants equal to $160 million at most while avoiding the need to seek shareholder approval. With a potential LC Facility and Second Lien Credit Agreement default of close to $1.5 billion, this may be insufficient.
Current Fair Market Value of the Convertible Senior Notes
SUNE detailed its Pro Forma Capital Structure on page 7 of the January Transaction Summary.
The current market values and yields to maturity for the Exchange Converts, Convertible Senior Notes and Perpetual Convertible Preferred Stock as of March 21st are provided below.
|Outstanding Debt and Preferred|
|Type||Face Value||Coupon||Date||Price||YTM||Mkt Value|
|Second Lien Tranche A3 Exchange Converts||$225||5.000%||Jul-18||63.25||28%||$142.31|
|Convertible Senior Notes||$256||2.000%||Oct-18||20.00||81%||$51.20|
|Convertible Senior Notes||$489||0.250%||Jun-20||7.00||85%||$34.23|
|Convertible Senior Notes||$290||2.750%||Jan-21||14.75||54%||$42.78|
|Convertible Senior Notes||$316||2.375%||Apr-22||8.75||57%||$27.65|
|Convertible Senior Notes||$310||2.635%||Jun-23||13.00||41%||$40.30|
|Convertible Senior Notes||$320||3.375%||Jun-25||9.25||46%||$29.60|
|Subtotal Convert Sen Notes||$1,981||$225.76|
|Perpetual Convertible Preferred||$492||6.750%||None||100||None||$49.20|
|($1,000 per share)|
The current fair market values of the Convertible Senior Notes are approximately 11% of their face value. In part this is due to the low coupons of these "busted" converts but the astronomical YTMs of the Convertible Senior Notes provide a stark reminder that investors are pricing in a SUNE bankruptcy. The most traded series (I hesitate to use the word liquid) of the various converts appears to be the 2% 2018 Notes that are trading at a YTM of 80%+.
The Convertible Senior Notes were issued in 144A offerings and have not been registered. They therefore trade amongst qualified institutions. Due to the fact they are busted converts and trading at very low prices, it is likely that the Notes have migrated from the initial converts buyers (mutual funds, retirement funds, insurance companies, etc) over the last four to five months to the hands of hedge funds, including Greenlight, and vulture investors who specialize in bankruptcy and restructuring situations and that the original investors have sold and recognized their losses. This creates an environment where a restructuring is anticipated and the current investors will likely expect to swap into a combination of notes and "Newco" equity and perhaps also provide the cash equity for SUNE's recapitalization.
Why Bankruptcy? Other Liabilities
Even if equity investors could negotiate an out of bankruptcy court restructuring with the LC Facility, Second Lien, Exchange Notes, Seller Notes, Other Recourse Debt, and Convertible Senior Notes creditors and the Perpetual Convertible Preferred stockholders and then go through what would be a lengthy SEC registration and review process in order to secure shareholder approval for a massively dilutive equity issuance, potential equity investors will not do it because of the overhang of the Vivint Solar (NYSE:VSLR) lawsuit, the SUNE shareholders lawsuits, the outstanding liabilities to TerraForm Global a) completion of projects committed at the time of the IPO, b) the interest support agreement, c) the completion of the 425 MWs of prepaid projects in India) and other liabilities. The new equity investors will not risk their equity investment by leaving these liabilities unaddressed. They will want a clean slate and that means bankruptcy.
Bond Investors, the Smartest People in the Room?
So is the bond market valuing the Exchange Converts, Convertible Senior Notes, and the Perpetual Convertible Preferred Stock correctly? Here is a back of the envelope sum of the parts valuation for SUNE.
|Sum of the Parts Valuation|
|Cash for Investment (see table above)||$120|
|Liquidity Amount per LC Facility (restricted cash)||$500|
|Annualized Estimated EBITDA @ 7x (see table above)||$1,400|
|GLBL Equity (63.3 million shares @ $3.31)||$210|
|TerraForm Power (NASDAQ:TERP) Equity (48.2 million shares @ $9.52)||$459|
|Second Lien Credit Agreement||$725|
|Sellers Notes ($215 mm @ 50%)||$108|
|Other Recourse Debt ($273 mm @ 50%)||$137|
|Convertible Senior Notes||$226|
|Perpetual Convertible Preferred||$49|
|Equity Market Value||$800|
|FirstWind Earnout ($201 mm @ 50%)||$101|
The Annualized EBITDA estimate of $200 million is probably generous at this point given the precipitous slowdown in project development that will continue into the second quarter. As noted above, 4Q EBITDA was a loss of $95 million. Given the slowdown in development activity, it is highly unlikely that management reduced costs sufficiently to achieve a $145 million turnaround in EBITDA in one quarter. This is a snapshot sum of the parts valuation so it does not take into effect the quarterly operating cash flow losses that SUNE will suffer.
There will be howls of derision that no value was given to the backlog and pipeline. The harsh reality is this: if a company does not have the capital to bring a project from the develop stage through construction to commercial operation, the pipeline is not worth much. If it was, buyers would be beating down SUNE's doors and they are not. Part of that may be the quality of PPAs (SUNE has always been accused of bidding too aggressively and relying on the decline in the cost of solar panels to make the projects economic).
SUNE has only been able to sell pre-construction projects to two buyers: the project equity for debt swap with the former owners of FirstWind (D.E. Shaw, Madison Dearborn, etc) that appears to have failed (more on that in my next article) and the prepayment sale of India assets to GLBL. Despite being in financial extremis, it has been unable to complete any other pre-construction or early construction sales. In addition, it still needs to complete and dropdown to GLBL more than 500 MWs of projects for which it will not derive any additional economic benefit.
The bond market valuation of the Convertible Senior Notes is a flashing red light warning that the probability of SUNE going bankrupt is quite high. SUNE may be able to avoid a near-term default by filing the 10-K on or shortly after March 30th. It may also be able to scrape together enough warrants and cash for a forbearance agreement with the creditors to buy more time if it misses the March 30th deadline. SUNE may have sold hundreds of MWs of completed projects without disclosing it publicly and therefore have a bit more liquidity than forecast. These things are all possible but increasingly unlikely as time goes by. There will be other issues, also, heaving over the horizon that will be increasingly difficult to deal with. At this point, there are better long and short investments in the market and SUNE should be avoided.
Disclosure: I am/we are long TERP.
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.
Additional disclosure: I may initiate a position in GLBL over the next 72 hours.