TerraForm Global's Latest Disclosures Have Been Causing Further Panic Among SunEdison Investors - And For Good Reason

| About: SunEdison, Inc. (SUNEQ)

Summary

TerraForm Global today disclosed a substantial risk for its parent SunEdison to seek bankruptcy protection soon.

SunEdison's CFO, Brian Wuebbels, also holds the CEO position at TerraForm Global and clearly has been actively involved in the ongoing negotiations.

Investors still long the stock should opportunistically exit remaining positions.

Equityholders will most likely get wiped out entirely in bankruptcy.

SunEdison's yieldcos might be worth a bet here.

Over the course of the last 24 hours, still faithful SunEdison (NYSE:SUNE) investors were served a severe double whammy.

First The Wall Street Journal published a story about the company now being investigated by the SEC for potentially overstating its liquidity position last year. The issue was originally brought up by current and former employees of the company at the end of last year and SunEdison initiated an ongoing audit committee investigation in response. However, the company did not disclose this information until the end of February 2016 when SunEdison warned of its inability to file the annual 10-K in time. So despite this information haven't been entirely new, the news of the SEC involvement took the shares down 25% during Monday's after-hours session.

Second - and obviously even more discomforting - the company's yieldco subsidiary TerraForm Global (NASDAQ:GLBL) filed an 8-K with the SEC in Tuesday's pre-market session disclosing a further delay to the filing of its annual report on Form 10-K and moreover pretty much detailing the potential ramifications of a Chapter 11 filing by parent SunEdison. Investors most likely panicked over the phrase "(...) there is a substantial risk that SunEdison will soon seek bankruptcy protection" and as a result, the shares finished the session down 55%.

In my view, investors are drawing the right conclusions from TerraForm Global's latest disclosures given that the company's CEO, Brian Wuebbels, also still holds the CFO position at SunEdison. If there's one person being heavily involved in the current negotiations with the company's lenders, it's actually Mr. Wuebbels. So if he suddenly feels the need for TerraForm Global to disclose a comprehensive list of ramifications in case of SunEdison's bankruptcy, and moreover asserts a substantial risk for this to happen soon, investors should reasonably expect this event to occur within short notice.

I have been a vocal critic of SunEdison and its miserable management for a long time now and already urged the company to abandon the costly and ill-fated Vivint Solar (NYSE:VSLR) acquisition and moreover replacing its top-level management back in November.

Furthermore, I heavily scrutinized the company's recent second lien term loan and accompanying debt exchange agreements in January.

Lastly, I already advised investors to prepare for a bankruptcy filing within short notice last week after a detailed Debtwire report about the company being in debtor-in-possession (DIP) financing negotiations surfaced. Readers looking for further details might also want to listen to Debtwire's respective radio show. Personally, I have been knowing Debtwire for many years as a reliable and usually highly credible source of information. Providing accurate information is actually imperative for an expensive subscription service aimed towards institutional investors like Debtwire.

Suffice to say, judging by the latest action in the shares, I will most likely be proven right as I still expect SunEdison to file for bankruptcy protection at any time now.

Personally, given the 75% decrease in the company's share price over the last few sessions, I decided not to get too greedy and covered my previous short position at the end of today's session.

Nevertheless, SunEdison still has a market capitalization of $180m which I would initially expect to drop below $50m after the company will have finally filed for bankruptcy protection. So most likely, there's still plenty of money to be made on the short side here, but admittedly the risk to get caught in a temporary short squeeze looks much higher at $0.56 than at $1.50 when I initially advised investors to enter into a short position in the shares last week. Unfortunately, the almost inevitable route down to zero won't be a one-way street going forward, so only investors with strong nerves should consider the shares for a short at these levels.

Even in bankruptcy, the shares will initially continue to experience sizeable volatility as evidenced by many similar cases in the past, before approaching the zero level asymptotically over time.

Investors should be aware that in case of bankruptcy, the NYSE will delist the company's shares within short notice. In most cases, the shares will then trade on the OTC, most likely under the new symbol "SUNEQ."

Should SunEdison succeed in negotiating a comprehensive plan of reorganization with its creditors, it will most likely be implemented through a pre-packaged Chapter 11 proceeding with the restructured company usually emerging from bankruptcy just a few months later. At this point, the company's old equity will ultimately get cancelled unless the plan of reorganization allocates a part of the restructured company to the shareholders. There's always a slight chance for this to happen, but given where the company's higher ranking bonds are currently trading, the chances for current equityholders to retain even a fraction of their previous stake in the company look close to zero here.

So shareholders still hoping for a positive outcome of the SunEdison saga will most likely end up with nothing while bondholders might still be entitled to some sort of recovery here although their chances aren't great either.

That said, the shares might put together some sort of short squeeze or dead cat bounce at any time here, even in bankruptcy. Investors still stuck with the shares should use these events to finally get rid of their remaining holdings and move on. The shares will remain a playground for traders of all kind for some time going forward until volatility and trading volume slowly abate over time.

Investors still looking to take a bet on SunEdison should perhaps focus on the company's yieldcos, TerraForm Power (NASDAQ:TERP) and TerraForm Global. While TERP has held up remarkably well, GLBL shares have largely mirrored SunEdison's death spiral move as of late. I have already discussed the reasons and the potential outcome for TerraForm Global in a separate article this morning.

Bottom line:

Today's news out of SunEdison's yieldco, TerraForm Global, is just another strong indication for the company's seemingly imminent bankruptcy filing given that Mr. Wuebbels is simultaneously holding both the CFO position at SunEdison and the CEO position at TerraForm Global.

A short position could still yield sizeable returns here, but the chance to get caught in some sort of temporary short squeeze or dead cat bounce has considerably increased at current price levels.

Investors still owning the shares should consider an exit preferably into the next bounce as otherwise they are at risk to get wiped out entirely in the upcoming bankruptcy proceedings.

Readers still looking to put some money to work here apart from potential daytrading activities, should consider SunEdison's yieldcos, TerraForm Power and TerraForm Global.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in 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.

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