Well, it's been almost three weeks since my article about SunEdison (SUNE) drew awe from some and ire from others. Of the two hundred or so comments received, I'd say a slight majority of them ridiculed my position that Wall Street was creating a story line filled with half truths, a plethora of speculation and wild conclusions that would make a Hitchcock movie seem amateurish. The truth is that after three weeks of reading multiple stories and opinions about what might be in store for the company, the fact remains that no one outside of the SunEdison board room knows for sure what lay ahead for investors. And as for Bergseng's five-step program for survival after SunEd, well, let's just say that for now it is way, way presumptuous.
In fact, now that the all-but-certain conclusion drawn up by the Wall Street pundits has failed to materialize - the assertion that SunEdison was "in talks with lenders for debtor-in-possession financing" - the tone has changed quite a bit. Now, the WS contributors have added the word "may", "appear" or "might" file bankruptcy or debtor-in-possession financing. The rhetoric during the prior two weeks has certainly been lessened from its one-time barrage of negative prophetic remarks.
Being a shareholder has not been entirely easy. But for SunEdison, it's not only uneasy, the company can't get any respect - not even from its own yieldco, TerraForm Global (NASDAQ:GLBL), which filed a lawsuit seeking to recover over $200 million that it says SunEdison misappropriated. Then, the SEC and Department of Justice jump in to take a shot at SunEdison to let us know that they are investigating some of the deals that company management "might" have orchestrated during the prior year or two. But investors were already aware that the SEC was looking over SUNE's shoulder, so it was no real surprise to many of us. However, it provided for a nice headline shock and an additional 20% decline in the share price. As for GLBL, I consider the lawsuit just a bit of posturing and an attempt to demonstrate that there is no collusion between the companies when it comes to spending each other's money. And why wouldn't they take the prudent step to cover their derriere when they are fully aware that almost every enforcement agency in the country has a watchful eye over SUNE? Heck, jail cells hold quite a few people these days, with the overcrowding and all. Perhaps taking a preemptive strike at their overextended parent is wise just for the sake of showing how above board and independent GLBL is when it comes to potential liability for some of the decisions made by Big Poppa Sun.
Oh, I know, people will continue to lecture me that SUNE has absolutely no chance at survival, and further warn me in no uncertain terms that I am misleading investors down a road of doom. But to this day, I have yet to see a credible piece of information that can change my opinion that there is an absolute chance that SunEdison emerges from this ordeal badly bruised, but far from dead.
There are several indicators which provide the basis for my argument that SUNE will survive the bombardment of bad press and speculation and emerge to fight another day, albeit with far more discipline and perhaps a newly minted management team.
First off, I like to follow the money. Since its most recent Form 13D filing in January 2016, Greenlight Capital and its affiliate, DME, indicated ownership of 6.8% of the common shares of SUNE. Flexing its ownership and activist muscle, Greenlight added quite a few measures to provide a shot to reclaim fame. Here is an excerpt of the filing that has held my interest, and it provides insight into much of my bullish case for the emergence of a reformed SunEdison:
"Greenlight intends to evaluate on an ongoing basis its investment in the Company and its options with respect to such investment. In connection with such evaluation, Greenlight may seek additional calls and meetings with members of the Board and/or senior management of the Company, or communicate publicly or privately with other stockholders or third parties to indicate Greenlight's views on issues relating to the strategic direction undertaken by the Company and other matters of interest to stockholders generally, including management. As part of such evaluation and any such discussions, Greenlight may make recommendations, suggestions or proposals to the Company that may relate to or result in one or more of the transactions specified in clauses (a) through (j) of Item 4 of Schedule 13D, including but not limited to: changes in the strategic direction of the Company as a means of enhancing shareholder value, changes to the Board, changes to the Company's senior management, changes to the Company's charter or bylaws, acquisitions or dispositions of securities of the Company, changes in the Company's capital structure or dividend policy, and the sale of material assets or another extraordinary corporate transaction, including a sale of the Company.
With power in hand, it makes far more sense that Greenlight and Einhorn would be motivated to work vigorously to implement a strategic plan prior to filing a bankruptcy petition.
Now, we know that Greenlight holds the 6.8%. And we can deduce from the fact that it has not filed an amended 13G indicating that its stake had fallen below 5%, which would be required under Rule 13d 2(a), which states that a filing would be required if a material change in ownership occurred, and such a filing would be made within a 10-day period from such a change. For purposes of the filing, the SEC determines that ownership change in excess of 1% of the class would be deemed material, triggering a filing. Now, I understand that the 10 days is kind of like a running clock, and that such a filing could occur tomorrow, based on the 10-day rule, but for my bullish case to continue, my assumption is that it still holds its entire position. In fact, using the 10-day rule, Greenlight may have even increased their stake. At this point, nobody truly knows.
Next, Greenlight has the leverage and the money. The old saying that he who has the gold makes the rules is evidently true in this case. Greenlight has reserved the right to have discussions with board members to initiate changes in governance, changes to the Board, changes to senior management and changes to the company's capital structure and/or dividend policy. Given the state of SUNE, my take is that Einhorn and his Greenlight Capital board seat have an arsenal of power, and it has most likely been fortified during recent discussions with other Board members of the company.
I find it highly unlikely that Greenlight and/or Einhorn pack their bags and walk away from the mess created by SUNE's overzealous behavior with regard to acquisition and growth strategy. Certainly, with the current share prices, Greenlight could quickly put together a deal to acquire the company in its entirety for less than its entire prior investment cost basis. Sure, throwing a bone to the common shareholders for less than $3.00 a share would absolutely stink, but considering the potential loss on its 27 million share position, the scenario makes far greater sense. And considering the options that SUNE might have otherwise, a sale of the company in the $3.00-5.00 range might be a reasonable option at this point, regardless of how shareholders would respond, especially when the pot of gold sits at Greenlight. For the acquirers it would be a great deal, especially when Einhorn previously valued the company at over $14.00 a share.
Regardless of the breakup value of SUNE, a sale of the company might not bring much more than that, at least in my opinion. But that is not to say a sale is the only option available, nor am I in the camp that SUNE must sell itself to survive.
SunEdison owns substantial assets, which is a very good thing. But the company also has a lot of debt. However, a good portion of the debt is non-recourse debt, meaning it would not be in the best interest of creditors to push SUNE into bankruptcy. This is where Einhorn's comments of a complex and convoluted accounting structure at SUNE come into play. A bankruptcy does little good for anyone, and a Chapter 7 filing is highly unlikely.
In a Chapter 7 scenario, which, in all honesty, is not discussed too much, there would be a liquidation of all company assets, and the company simply winds down and becomes a lesson about investing to many of the shareholders. This is where Bergseng's five-step program would be helpful. But a Chapter 7 is highly unlikely on too many levels to even consider it as a viable option.
The Chapter 11 filing is the case that gets most of the attention. In such a filing there would be a financial slug fest and years of case management by the trustee to determine who gets what, where and when. Then, add to that battle many additional years of litigation for the trustee to substantiate the disbursements to creditors. In its most recent filing, SUNE stated that of the approximately $12 billion in total debt, only about $3 billion was classified as recourse debt. Thus, even a Chapter 11 filing is certainly not the choice of lenders. Many creditor claims would have no merit, and the long legal battles associated with getting any relief from the trustee might prove costly. And with Greenlight holding such a large stake in the company, even a Chapter 11 filing might not mean the end of shareholder value for those of us who hold common shares. A Chapter 11 filing, in many cases, wipes out the common shares. However, in the case of SUNE, even if such a filing occurred, my expectation would be that shareholders would be diluted, but not wiped out. It simply is not in the interest of Greenlight to wipe out hundreds of millions of dollars of investment, while at the same time orchestrating a deal to take the company private. In that respect, Greenlight would have its own bout of legal issues in that it could be accused of self dealing via its representation on the board. So, I tend to rule out a Chapter 11 filing on that basis. To put it simply, it would take a relatively small amount of money to save a whole lot of money... at least in Einhorn's world.
In recent days, the most common articles that have come to light are those that bring attention to the rumor that SUNE is in discussions to sell off some of its India assets. Now, this too would be contrary to a Chapter 11 filing and fortifies my argument. Bankruptcy rules are complex, and one size certainly does not fit all. But selling assets with plans to file a bankruptcy is a big-time no-no. In fact, if the assets are sold at less than market value, such a sale could be reversed by the trustee, and the buyer would be required to return the assets to the trustee for potential distribution. Now, considering that SUNE does indeed sell some assets, the buyer would be quite naive to hand a check over to the company with the knowledge that the cash could be quickly spent to shore up other liabilities, while at the same time be required to hand back the assets purchased. It just does not make sense.
But if readers are to take stock in some reports, it only makes sense to take stock in others. Thus, with credible news agencies publishing stories about the potential asset sale, it leads me to believe that SUNE is not discussing bankruptcy protection. If it were, the paper trail would be too long, and too many people would be exposed to criminal liability - criminal in that they would be committing fraud in respect to disclosures required by the bankruptcy court. Thus, I see an asset sale as the first of many strategic moves to make SunEdison lean instead of continuing as a bloated entity.
SunEdison has the opportunity to sell some assets, restructure its management team and rehabilitate from the horrendous start of 2016. Once reformed and rebalanced, the company, under a disciplined management, can formulate a strategy for growth and return to a structured plan that can justify higher share valuations. This is what I deem as the viable and likely outcome.
In any event, I find SunEdison on the verge of being reborn, not laid to rest. Too many variables, from Einhorn to the complexity of the debt, lead me to believe that a restructured SUNE is far better than one that is mired in legal limbo, with a trustee trying to determine who gets a sum of the parts. Not only would the legal battles be fought for decades, the potential loss to Greenlight and other large hedge and investment funds is simply too big for SUNE to fail.
My expectation is simple. In the next two weeks, SUNE will file its long-awaited 10-K and put to rest the fears of bankruptcy. The company will replace senior management as well as some members of the Board. It will receive additional funds, which will be dilutive, but applauded by the markets.
From there, SUNE emerges as a lean, mean solar machine, putting its pundits to rest and beginning a long road to building back shareholder value and market trust. And with the memory of Wall Street investors, the time needed to change the sentiment can be as little as a single day.
Disclosure: I am/we are long 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.
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