SunEdison Could Overcome Its Liquidity Issues

| About: SunEdison, Inc. (SUNEQ)

Summary

It seems all but imminent that SunEdison (SUNE) will file Chapter 11.

We believe that there is a coherent case for SunEdison to avoid bankruptcy filings.

Should the company not file for bankruptcy we believe SunEdison could increase 40.0x in value.

It seems all but imminent that SunEdison (NYSE:SUNE) will file Chapter 11, especially after the April 15th 8-K SEC filing, which described that the company was looking debtor in possession ("DIP") financing on March 17th 2016 from its 1st and 2nd lien holders.

While we agree that SunEdison is under significant financial distress and facing liquidity issues, we believe that there is a coherent case for SunEdison to avoid bankruptcy filings and that there is a coherent case for a long thesis.

On April 2nd 2016, SunEdison management projected that the company would run out of cash in 2Q2016. The company would start with $34.0MM in cash in April 7th 2016, but this cash balance would quickly dwindle. The company would have additional working capital requirements, pushing its cash balance to negative ($240.0MM), thereby requiring DIP financing.

The chart below provided by management on April 2 2016 describes the company's cash situation.

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Source: Management Estimates

However, later, on April 3rd, 2016, Management revealed that they had ~282.0 mega-watt of completed solar projects, representing approximately $423.0MM in asset value (assuming an average selling price of $1.5 per watt net of 25.0% tax equity as per the business update in December 2015). Selling these projects to third parties or warehousing these projects could generate a significant amount of cash.

The chart below provided by management on April 3, 2016 illustrates the company's completed and in progress projects.

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Source: Management Estimates

Based on this project completion timeline, management revised the cash balance projections significantly upward on April 11, 2016. Management expects the company to have a positive cash balance in 2Q2016. This means they could be in the position of not requiring debtor in possession financing as it could potentially sell its equity interests in its newly completed projects to shore up liquidity. SunEdison's India asset sales, which currently have interested buyers, according to an Indian newspaper, LiveMint, gives us a bit of confidence that this plan could be executed.

The chart below provided by management on April 11 2016 describes the company's cash situation.

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Source: Management Estimates

Moving to the 2nd half of 2016, management believes it will be extremely cash flow generate from the completion of 3 major projects, including the following.

  1. US1 - This 156MW project is 89% complete and would likely generate $234.0MM in cash flow.
  2. Chile 3 - This 110MW project is 93% complete and would likely generate $165.0MM in cash flow.
  3. Chile 1 - This 137MW project is 57% complete would likely generate $206.0MM in cash flow.

Overall, SunEdison expects to generate $831.0MM in cash flow from 2Q 2016 to 4Q 2016.

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Source: Management Expectations

While we agree there is significant execution risk associated with SunEdison and that the potential for bankruptcy is elevated, we believe that the upside, should SunEdison make it out of this cash crunch, is very high. Should SunEdison make it through this liquidity crunch, the upside, we estimate, is 40.0x ($0.35 current share price vs fair value of $14.7).

The chart below calculates the valuation analysis.

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Source: Author's estimates

To provide some color on our valuations

  1. The development company is expected to complete 3.0 GW of solar projects at an average selling price of $1.5 per watt and at a margin of $0.30 per watt. This unit is further expected to have an operating expense of $600.0 million in aggregate. This estimate is lower than that of managements' to account for execution risk.
  2. Services Company is expected to service 6.0GW of existing solar power projects and generate $443.0 million in revenue at a 47.0% margin. This estimate is in line with that of managements' as the company's services contracts are locked in with utilities for approximately 6 years and the terms are unlikely to change materially.
  3. SUNE's interest in Terraform Power (NASDAQ:TERP) is calculated by multiplying SUNE's equity interest by the current share price as of close of 4/18/2016.
  4. SUNE's interest in Terraform Global (NASDAQ:GLBL) is calculated by multiplying SUNE's equity interest by the current share price as of close of 4/18/2016.
  5. SUNE's interest in extraneous assets were provided from SUNE's business update in Dec. 2015.
  6. SUNE's debt was calculated as illustrated by the chart below, which was gathered from SUNE's 3Q2015 10Q and updated in accordance with the Jan 2016 transaction update.

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Source: Author's estimates

While we believe there is a high possibility that SunEdison may restructure or file for bankruptcy, we see a potential solution for the company to overcome its liquidity problems. Should the company not file for bankruptcy we believe SunEdison could increase 40.0x in value.

While the scenario we describe may not seem likely, it has occurred in the past. General Growth Partners (NYSE:GGP) was a company on the verge of bankruptcy, but pulled through, rewarding its investors a 90.0x reward. We believe that there is a reasonable possibility SunEdison can avoid bankruptcy.

History does not repeat itself but it does rhyme.

- Mark Twain

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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