By Parke Shall
We don't like writing about SunEdison (SUNE) any more than you probably like reading our articles, judging by the comments we've received over the last few weeks from those long the stock. We have said with a certain degree of certainty over the last few weeks that SunEdison is going to be filing for bankruptcy, and that likely means a total wipeout for equity holders.
We're not morbid people and we don't like constantly publishing negative articles on any company, let alone one that we think is in an industry that's ultimately going to be very lucrative. But SUNE missed the boat, and this round of equity holders has already suffered massive losses. Those buying or holding here around $0.40 have the chance to suffer additional losses that we believe will likely be well over 90% when all is said and done.
Today we will look at the latest evidence that the company will file bankruptcy, and what this is going to mean from this point forward with SUNE trading at $0.40 per share.
We have been supporting the case for a bankruptcy filing since the early pieces of evidence started to trickle in. The original Debtwire article that first stated the company was in debtor-in-possession financing was sourced well enough, in conjunction with the evidence of the company's stressed financials, for us to stake a claim that the company would be entering Chapter 11 bankruptcy protection.
This DIP news came after the company was unable to file it's 10-K, which we later found out was due to concerns over whether the company had overstated its cash position. These concerns, we learned, were also being investigated by the Securities and Exchange Commission.
Perhaps the miraculous turnaround at Chesapeake (NYSE:CHK) is leading some to believe that there is hope for SunEdison's equity after all. Over the last month, there has been more than one article that has popped up on Seeking Alpha making the case that the company is not going to file for bankruptcy protection. One of these articles even appeared recently, after it was confirmed that the company had hired two new advisers for a restructuring. These articles cite bond trading as reasons the equity might survive.
This isn't a great way to analyze the situation, as bonds -- especially senior ones -- are treated far differently in a restructuring than equity, which is junior. The gist of a bankruptcy is that many of the debtholders wind up with large equity stakes, and the common shares as they were prior to the restructuring become worthless, or close to it. The new equity stake for the bondholders ensures that they will make good on their loans to the company, while equity holders are usually wiped out. This is the basic setup of a Chapter 11, which we have seen in instances like with General Motors. Sometimes warrants are issued, as was the case with General Motors, but for all intents and purposes the equity as it stands right now at $0.40 is likely to become close to worthless.
On Tuesday, we received news that the company had hired new advisers to help with this restructuring. Benzinga reported the following:
SunEdison hired Skadden, Arps, Slate, Meagher & Flom as legal adviser and Houlihan Lokey as financial adviser as the company appears to be moving forward with its bankruptcy process.
Bloomberg, citing 'two sources familiar with the situation,' reported the company's advisers will help reorganize $11.7 billion in short and long-term debt that SunEdison raked up.
On the back of this news, we thought it would be prudent to -- once again, and possibly for the last time -- warn investors that there is still significant downside here even if you were buying the equity at $0.40. A 90% loss is still 90% of your capital, whether the stock is going from $100 to $10 or from $0.40-$0.05. The return on your investment capital is going to be the same.
Do not let the low price of SUNE shares fool you. They are likely to become nearly worthless when the company completes its bankruptcy and restructuring. We're not sure that we would be short here, and we are not -- however, if you own the equity at $0.40, we believe that you are getting a good enough bid to exit and still save a bit of your capital. Just because you were down already on your initial investment doesn't mean that you should continue to lose money.
In addition, with the SEC involved and investigating the company's cash position, there is now regulatory risk that one has to factor into his or her analysis of the company. If the company overstated its cash position or its liquidity, it's going to have regulatory worries to take care of in addition to worrying about a restructuring.
The bankruptcy restructuring very clearly seems to be moving forward, and we expect SUNE to trade as SUNEQ in the near future -- wiping out almost all equity holders at this level.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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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