SunEdison Reporting Issues: TerraForm Power 8-K Discloses Good News

| About: SunEdison, Inc. (SUNEQ)

Summary

TerraForm Power had 90 days from the end of 2015 to submit the financial reports to the lenders under its credit agreement or a technical default would have occurred.

TerraForm Power filed an 8-K April 4th, disclosing that the credit facility lenders extended the filing deadline until April 30th.

The 8-K also disclosed the extremely positive news that a SUNE bankruptcy would likely have no impact on the PPAs supporting TerraForm Power's projects.

TERP believes it will be able to cure any technical defaults under project debt financings that rely on SunEdison's O&M or asset management agreements.

The lock-up on TerraForm's shares swapped by SunEdison for exchangeable notes held by Madison Dearborn, D.E. Shaw and Northwestern University expired on April 1st.

Finally Some Good News! TerraForm Power (NASDAQ:TERP) 8-K

On April 4th, TERP filed an 8-K that was chock-a-block with good news for beleaguered TERP shareholders, and it should have resulted in a far stronger stock price performance than occurred. The most important disclosures were:

  • TERP agreed with its lenders to extend the annual financial report due date to April 30th. TERP did not attach the 4th amendment to the credit agreement, so it was unclear what concessions were made to the lenders. Investors should assume that restrictions were put in place regarding drawdowns of the revolver and issuance of additional LCs. It is also likely that suspension of the common stock dividend until the resolution of financial reporting issues was required (see the dividend discussion below).
  • TERP stated that it "does not rely substantially on SunEdison (SUNE) for funding or liquidity and believes that, in the event SUNE seeks bankruptcy protection, the company will have sufficient liquidity to support its ongoing operations."
  • TerraForm disclosed that "while our relevant review remains ongoing, we have not identified any significant power purchase agreement that includes a provision that would permit the off-take counterparty to terminate the agreement in the event of a SunEdison bankruptcy." This disclosure is of massive importance to the future operating and financial performance of TERP.
  • TERP provided assurance regarding its ability to cure any potential technical defaults that may occur under non-recourse project level debt in the instance of a SUNE bankruptcy filing. "...a SunEdison bankruptcy could result in a default under many of our non-recourse project-debt financing agreements; however, these defaults are generally curable. If SunEdison files for bankruptcy, we will work with our project lenders to obtain waivers and/or forbearance agreements as we seek to cure such defaults, however no assurances can be given that such waivers/forbearance agreements will be obtained." There are definite economic incentives for the project lenders and offtakers to cooperate with TERP in addressing any technical defaults (see below).

In summary, the 8-K was a green light for long-term value investors with the stomach for some potential turbulence.

Background

TerraForm Power filed an NT-10-K on February 29th disclosing that it was "unable to timely file its Form 10-K Annual Report for the year ended December 31, 2015". On March 29th, TERP's sister company, TerraForm Global (NASDAQ:GLBL), filed an 8-K in which it disclosed that it would delay the filing of its 10-K due to "material weaknesses in ... internal controls over financial reporting, primarily due to deficient information technology controls in connection with newly implemented systems" of SunEdison, the parent company of both TERP and GLBL. Both TERP and GLBL have management services agreements with SUNE and their financial reporting and control processes rely significantly on SUNE so what effects one effects the other.

The accounting and reporting issues were further compounded by the announcement of a Department of Justice ("DOJ") investigation (in concert with an SEC investigation) and the issuance of a subpoena requesting information from SUNE. This was followed by the filing of a lawsuit by GLBL against SUNE accusing it of fraud, unjust enrichment, breach of fiduciary duties, breach of contract, etc. The GLBL complaint is a chilling account of corporate malfeasance and it will certainly result in the demise of SUNE's CEO Ahmad Chatila and its General Counsel Martin Truong.

All these events make it unlikely that financial statements will be forthcoming from SUNE in the near term. GLBL and TERP will be unable to file financial statements until the accounting and financial reporting issues are resolved at SUNE and their outside auditors can provide reasonable assurance that the financial statements "are free of material misstatements and are presented fairly in accordance with the Generally Accepted Accounting Principles." Unfortunately, in an instance where fraud is a serious concern and investigations are ongoing, the auditors will be in no rush to put their necks on the chopping block. Nor should they.

TERP Credit Facility

TERP has a credit facility with a capacity of $725 million allocated between a revolver (with a swing loan sublimit of $20 million) and a Letter of Credit ("LC") sublimit of $200 million. At September 30th, 2015, there was $0 outstanding under the revolver and $67 million LCs outstanding. Under Section 5.1.c of the credit agreement, a technical default (a default not involving a failure to pay interest or principal) would occur if TERP failed to file an annual report by March 30th. Under Section 8.1.c, the technical default becomes an event of default due to:

  • "Failure for longer than 10 business days of any credit party to perform or comply with any term or condition contained in Section 5.1, 5.1(c), 5.1(d) or 5.1(f)" and
  • upon the occurrence and during the continuance of any other event of default, at the request of (or with the consent of) requisite lenders, upon notice to the borrower by the administrative agent, a) the revolving commitments, if any, of each lender having such revolving commitments and the obligation of issuing bank to issue any letter of credit shall immediately terminate; b) each of the following shall immediately become due and payable, in each case without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by each credit party: i) the unpaid principal amount of and accrued interest and premium on the loans, ii) an amount equal to the maximum amount that may at any time be drawn under all letters of credit then outstanding (regardless of whether any beneficiary under any such letter of credit shall have presented, or shall be entitled at such time to present, the drafts or other documents or certificates required to draw under such letters of credit), and iii) all other obligations..."

Requisite lenders is defined as 50% of the aggregate revolver exposure. So in short, unless TERP negotiates an agreement with the lenders under the credit agreement by April 13th, the technical default becomes an event of default and, if lenders representing 50% of the revolver commitments request it, the credit facility will become due and payable.

TERP and GLBL share many of the same lenders under their respective credit facilities. In the March 29th 8-K filing cited above, GLBL disclosed it was in negotiations with its lenders regarding an extension of the delivery date for its 10-K. Apparently, TERP was also.

TERP Common Stock Dividend

The extension granted by the credit facility Lenders likely required certain concessions by TERP, including a reduction in the revolver commitments and the LC sublimit and a suspension or a reduction in the dividend. As of April 4th, 129 days had passed since TERP had paid a dividend and 147 days since it declared a dividend, so such a dividend suspension should not come as a surprise to shareholders.

The basis for the suspension of the common stock dividend can be found in Section 6.4.c that discusses restricted junior payments. Common stock dividends fall under the definition of restricted junior payments and they are allowed only if an event of default has not occurred. If an extension agreement had not been reached, an event of default would have occurred on April 13th. The lenders therefore had the negotiating leverage to force a suspension until there is a resolution to the financial filing delays and until the lenders could determine if a SUNE bankruptcy filing would result in changes to TERP contracts that would have a material adverse effect (Section 5.1.k) on its financial results and operations.

Although a dividend suspension would be a near-term disappointment to investors, once the financial reporting issues are dealt with, TERP is highly likely to reinstate a dividend at or near current levels. In the near term, the cash not paid out as a dividend (approximately $49 million per quarter) will provide additional liquidity and balance sheet strength.

SUNE Continued Ownership of TERP and Credit Support Issues

A SUNE bankruptcy could result in the liquidation of some or all of its assets to meet its liabilities. TERP and GLBL common stock owned by SUNE is pledged to the lenders under the SUNE LC facility and second-lien financing and this pledge would be primed by liens to secure the debtor in possession financing that will likely be arranged in concert with the bankruptcy filing. A scenario where SUNE liquidates its ownership in TERP and GLBL is therefore a real possibility. The continued ownership or control language and credit support requirements included in some TERP owned project agreements will not have a meaningful impact on for the following reasons.

  • The value to counterparties of SUNE's continued ownership and control of TERP has declined precipitously as its financial problems have increased. Most of the projects owned by TERP have been commercially operating for a sufficient period of time without issues that the counterparties would likely welcome replacing SUNE as a guarantor or counterparty. Project lenders and, if applicable, offtakers will cooperate in replacing SUNE with creditworthy parties to perform O&M and asset management.
  • Sourcing creditworthy (i.e. capable of posting LCs) alternative O&M providers for TERP's portfolio of projects will be quite easy and the existing O&M contracts likely contain termination clauses in the event of a SUNE bankruptcy.
  • U.S. utilities have renewable portfolio standards to meet and would likely be loathe to jeopardize contracts for existing operating renewable capacity by enforcing change in ownership provisions.
  • Project lenders have no economic incentive to enforce technical defaults in the event SUNE files bankruptcy, as long as principal and interest payments are being made. The lenders will waive the technical defaults in order to keep the loans classified as performing.

TERP Senior Notes Cross Default Language

Section 6.01.5.b of the senior notes indenture defines an event of default with respect to the senior notes as including the acceleration of any indebtedness prior to its maturity. The credit agreement would be included under the definition of indebtedness under the senior note indenture so if an event of default occurs under the credit agreement, there would be a senior notes cross default. An important proviso to the cross default language is that the indebtedness would need to exceed "the greater of 1.5% of total assets and (ii) $100.0 million". The language implies that it means principal outstanding but it is not explicit. In any event, this cross default language provides additional motivation to TERP and to the lenders to continue to extend the financial filings date beyond April 30th, if it becomes necessary.

No Minimum Credit Ratings Required in TERP Indentures

Neither the credit agreement nor the senior notes indenture contain any requirement to maintain a minimum credit rating. The senior notes indenture section does require that TERP continues to rated. This should not be an issue given the $1.2 billion of outstanding Senior Notes and TERP's reasonable financial condition. The yield to maturity of the 5 7/8% and 6 1/8% senior notes have tightened by approximately 170 bps and 65 bps, respectively, over the last two weeks and they are currently trading at YTMs of 9.4% and 8.9%. These YTMs clearly do not indicate any market concern over a potential negative impact on TERP of a SUNE bankruptcy.

TERP Change in Control Covenants in Debt Indentures

A liquidation of SunEdison's ownership of TERP would not result in a change in control under either the credit facility agreement or the senior notes indenture since SUNE's Class B shares would be converted to Class A shares prior to a sale and would represent less than 50% of its voting interests.

Conclusion

The willingness of TERP's credit facility lenders to extend the financial reports filing deadline is great news for TERP's shareholders as is its disclosure of the limited potential financial impact of a SUNE bankruptcy. This disclosure should have dispelled the lingering financial concerns of a SUNE bankruptcy reflected in TERP's current stock price. The decline in the YTMs of TERP's senior notes certainly reflect a decline in credit concerns.

There are still challenges ahead for TERP as it needs to establish its own accounting and financial reporting systems and begin to hire staff to do deal origination, asset management, and, eventually, operations and maintenance on its projects. This may result in increased costs for TERP, but all of these steps are necessary to establish itself as a standalone entity. My next TERP article will look at valuation.

Expiration of Lockup on TERP Common Stock

The Lockup on TERP's shares swapped by SUNE for the exchangeable notes issued in the acquisition of First Wind (discussed here) expired on April 1st. The holders of the approximately 12.2 million shares may request a registration of these shares, and this may create a bit of an overhang in the market until sold off.

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 have no position in GLBL but may initiate a position within the next 72 hours.

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