Does SunEdison Liquidity Path Run Through TerraForm?

| About: SunEdison, Inc. (SUNEQ)


SunEdison continues to be in the news for its distress but the Company continues to have levers it can exercise to enhance liquidity.

The Company faces several short-term challenges including its ongoing audit, Vivint Solar saga, and more recently its inability to close project sales on time.

We discuss how the Company's O&M business can be used to inject in excess of $1B in liquidity into the Company in the short term.

SunEdison (SUNE) stock continued to drift down on reports from DebtWire indicating that the Company is in discussions with restructuring specialist Rothschild about needing additional cash to the tune of $300M.

The story, which has yet to be denied by SunEdison, indicates liquidity or debt-related problems at the Company. With the termination of Vivint Solar (NYSE:VSLR) deal, investors were expecting SunEdison's liquidity and debt situation to have improved significantly. So, what gives?

We suspect that the most recent crisis at SunEdison may have to do with:

a. Finding a solution to the ongoing Vivint Solar problem. i.e. settle or cut off Vivint claim that can overwhelm the Company.

b. Inability at the Company to close project sales on a timely basis. Two most recent highly visible examples of the problems are:

- The challenges that the Company has faced with its projects in the HECO territory

- The apparent sale of Indian projects to Macquarie

Of the above two vectors, it is difficult to speculate on what the Company may or may not be doing when it comes to the Vivint agreement. However, if Vivint draws the settlement discussions out, the likely loser here could be Vivint. With the uncertainty impacting SunEdison's prospects in a material way, Vivint risks running out of time in terms of arriving at a favorable settlement.

The challenge to Vivint comes primarily in terms of SunEdison's ongoing credit crunch. SunEdison is in the business of developing large projects, The Company depends on its YieldCos, warehouses, as well as third parties to buy the projects it develops at a reasonable price. This sales pipeline has now been stressed at least in part due to SunEdison's credit problems.

With revenues delayed and projects that need to be completed, the Company could end up needing short-term cash to tide it over until the project sales occur. The reason we use the word "appear" is that there have not been any detailed disclosures from the Company since its Q3 2015 earnings release in October 2015. Speculation about the Company has been rampant in lieu of proper disclosures from the Company and it is safe to say that the Company is stressed. For SunEdison longs, relief may not be sight until the Company can put behind it at least one of the top three factors that have caused the current stress. These, in no particular order of importance are:

- Announcement of end of audit and a date for Q4 results and 10-K

- Resolution of the Vivint Solar deal

- Announcement of major project sales (ex: HECO or Indian assets)

However, the latter factors, to a large degree, are out of management control and therefore difficult to forecast. The completion of audit, assuming there is no significant negative news, can help the Company's stock price but does not solve any cash-related problems it may have. The question then becomes what options SunEdison has to raise any short-term cash that it may need.

Excluding whatever may develop from the debt restructuring discussions, here are some assets that SunEdison can sell to raise some cash:

- Selling completed and partially completed projects: Clearly the Company has made less than desired progress on this front so it is unclear if investors can expect anything meaningful on that front without the Company resorting to a fire sale.

- Selling backlog and pipeline: With the Company stressed for cash, it is clear that the Company will not be able to develop much of its backlog/pipeline and it would make eminent sense to sell these undeveloped or incomplete assets to third parties. While this can certainly raise some money, it would have to be done at wholesale prices and possibly even at distress prices. Either of these options will reduce the Company's future profitability but will likely be a necessary step.

- Selling the Company's share of TerraForm Power (NASDAQ:TERP) and TerraForm Global (NASDAQ:GLBL): While the Company holds a significant share of both of its Yieldcos, considering the various debt related covenants that the Company needs to comply, it is unclear if the Company can sell much or any of its equity stakes.

- Sale of the Company's Operations & Maintenance business: The O&M business, per SunEdison December 2015 presentation, is forecasted to generate about $223M of EBITDA for the Company in 2016. However, given the Company's troubles, it is likely that this figure is now down to about $200M or less. Nevertheless, this is a highly profitable recurring revenue business that is very attractive to investors.

While the Company's sale of assets to third parties can be speculative under the current environment, the last option discussed above has some strong merits and certainly has the potential to deliver over a billion dollars in cash within a short time.

The merits of the O&M business are as follows. According to the Company 83% of the contracts are for 6 years or longer duration; 64% of the contracts are 10 years or longer. And, even the shorter contracts have automatic renewal clauses which will likely make them dependable for several years to come.

The challenge for SunEdison is that this excellent O&M business may not fetch an appropriate valuation in the current market considering SunEdison's distress. It does not help that the most likely buyer for such assets could be First Solar (NASDAQ:FSLR) - the Company's competitor in the utility scale business. Among other challenges, SunEdison may not want the stigma of having sold its O&M assets to its major competitor.

Herein lies an intriguing possibility. Given the recurring nature of the O&M revenues, the O&M business can be an excellent target for TerraForm Power and TerraForm Global. We can envision a win-win transaction for all parties if SunEdison sells the O&M business to TerraForm. We see the following benefits with the proposed transaction:

- TerraForm Power and TerraForm Global split the assets so that the O&M business falls along their target markets (i.e. OECD and Emerging Markets)

- TerraForm Power and Global currently have considerable liquidity due to various cancelled deals

- TerraForm Power and Global will get O&M competency which can be highly beneficial for the Companies in the long term

- TerraForm Power and Global will get another valuable contracted revenue stream synergistic with core business

- Acquiring the O&M will further de-link the YieldCos from their parent in the event of ongoing distress or bankruptcy at SunEdison

- TerraForm Power and Global will likely get a discounted valuation

- SunEdison will likely get immediate cash in excess of $1B and get a superior valuation compared to selling to third parties

- To the extent that SunEdison will have to make the sale at a lower valuation than desired, it will get back some of the benefits through ownership interests in TerraForm as well as future IDRs.

On the flip side, the transaction has the following disadvantages:

- To ensure that TerraForm Power and Global stay bankruptcy remote from SunEdison, such a transaction will have to be made at a healthy valuation that does not attract creditors' ire at a later date. There could be some small risk to the TerraForm shareholders on this front.

- The liquidity of TerraForm Power and Global will likely be taken up by this transaction and one or both entities may have to raise some debt. While the debt service ratios will still be healthy, this can be seen as a mild negative depending on the amount of capital that needs to be raised.

All things considered, we view this transaction as a win-win-win for all three players and as something that could happen if SunEdison needs to generate a substantial amount of cash in a short order.

While this discussion does not speak to the strength of SunEdison, it does speak to the value levers the Company has yet to exercise.

Shorts forecasting SunEdison's demise have to be careful. The Company still has this last but powerful level to pull, even if it cannot complete the HECO or Indian asset sale in the short term.

Disclosure: I am/we are long SUNE, TERP, GLBL, FSLR.

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.