By Parke Shall
We think that it goes without saying that after last night's news, the equity in SunEdison (SUNE) is 100% not investable at this time. For the last few months, there has been a debate as to whether or not SUNE was going to be able to pull itself up by its bootstraps, deal with its debt, and be able to continue without a restructuring that would ostensibly wipe out the equity. With one day left before SunEdison should be filing its 10-K, we just do not believe that SunEdison is going to make it without the help of Chapter 11 restructuring.
New information out last night and reported on by the Wall Street Journal seems to help indicate the same thing. Fortune followed up this morning,
The U.S. Securities and Exchange Commission is looking into SunEdison's disclosures to see if the solar company exaggerated its liquidity last year when it said it had more than $1 billion in cash, the Wall Street Journal reported on Monday.
SEC officials are looking into how much cash the company had on hand in August, when it said it would form a $1 billion warehouse investment vehicle along with funds managed by Goldman Sachs Group GSJ 0.42% , the Journal said, citing people familiar with the matter.
The company, whose shares had fallen about 95% over the past 12 months, is also working with advisers on a potential bankruptcy filing, the newspaper said.
The WSJ also said that the $1.4 billion in cash that SunEdison SUNE 4.13% had reported as having as of its third quarter consisted largely of cash that it could not access, adding that the balance had dropped to less than $100 million by November.
The Wall Street Journal reported last Night that the SEC was investigating the company over its disclosures, and that the previously mentioned questions about the company's liquidity where specifically tailored towards whether or not the company had all $1.4 billion in cash that it stated it had at the end of Q3 2015.
Citing sources, the Wall Street Journal said that they heard the company's cash position was "much lower" (Fortune reports $100M) than what had been reported. Since the company's liquidity is really the main issue at bar for SUNE, we have to think that current management will no longer be able to be trusted no matter what the outcome, and that the company's current share structure and capital structure will not survive.
This comes after reports surfaced last week that the company was in debtor-in-possession financing talks, seemingly trying to secure some type of future on the other end of a restructuring. There were a few buyout rumors out yesterday morning, all of which seemed ridiculous from the get-go that were swiped aside quickly; and on the back of this new news, SUNE finds itself trading under one dollar in premarket action today.
Another reason liquidity is important in a situation like this is because it helps determine whether or not the company is in default of any of its debt covenants. We are not going to undertake the painstaking process of reviewing all of the company's debt covenants, but what we will say is that they are often tied to the amount of cash that the company has on hand and that some of these covenants will likely need to be reviewed ad nauseam to ensure that they were not in default if the company has to update its cash balance for Q3 2015.
If a fake cash balance was used to secure more financing, as the Fortune article points out, it could mean even bigger problems.
This is also the first time we have had color on what could be holding up the company filing its 10-K. Previously, the company had just stated that it had something to do with their liquidity, and now we know that it has to do with the most important part of their liquidity, which is their actual cash holdings. This is why cash holdings are listed first on a balance sheet; it is the most liquid and most important of all assets.
This news also puts into perspective why the company's CFO may have left just weeks ago. We prognosticated about this news when it happened, saying that it was not likely to be a good sign in a company that is as distressed as SUNE. A CFO that could turn the company around would have been negotiating himself new options and performance-based bonuses. This one simply left the scene of the crime.
The SEC investigation that we read about last night is just one other item that is going to help delay the companies 10-K filing no matter what progress the company is making. We do not expect the company to file on time and we do not expect the equity to be worth much in as little as days or weeks. The bond market has already given up on SUNE, as written about in this great article here. The bond market is usually sharper and smarter than the equity market, and we think the bonds are telling the story of a company where Chapter 11 is absolutely imminent.
To conclude, it has been one piece of bad news after another for SUNE. The company was mismanaged and run into the ground and now more problems are starting to surface. As we saw with Valeant (NYSE:VRX), irregularities in accounting issues are not the types of problems that you want to have an any company, let alone one that is so over levered that it could topple at any second.
Despite this, trading in TerraForm Power (NASDAQ:TERP) and TerraForm Global (NASDAQ:GLBL) has held up and we would not be touching either of those equities as well. Until we find out how deep this rabbit hole goes and how exposed SUNE's spin off companies could be, we can't have confidence in an investment that anything SUNE has touched.
In an equity restructuring, the initial common equity can sometimes escape at pennies on the dollar. Based on this alone, we think SUNE will be under $0.10 relatively soon. There is still, however, the chance that current equity holders are 100% wiped out, even from this morning's prices well under $1. We don't see a scenario where common equity finds its way back.
Disclosure: I am/we are short SUNE.
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.