TerraForm Global - Good News And Bad News From Brazil, Senior Note Repurchase, Other Recent Disclosures

| About: TerraForm Global (GLBL)

Summary

On April 4, Renova Energia disclosed in a filing with Brazilian regulators that it exercised its put of TerraForm Global shares to SunEdison.

Renova Energia also disclosed the termination of the acquisition of ESPRA by TerraForm Global in return for a $10 million payment by Global.

Renova Energia Investor Relations disclosed that the liens on Salvador and Bahia wind projects were released in January. This was very material positive news not previously disclosed by Global.

Global's April 8th 8-K failed to disclose the ESPRA termination. It also made no mention of an extension of the annual financial statements deadline by its Lenders.

The Global 8-K did disclose the close of the Solarpack acquisition (26.4 MWs), but also the continued failure to close the BioTherm acquisition.

Renova Energia Put of Global Shares to SunEdison

In a filing with Brazilian regulators dated April 4, Renova Energia disclosed that it had exercised its right to put 7 million shares of TerraForm Global (NASDAQ:GLBL) to SunEdison (SUNE). The put was discussed in this article: "As part of the purchase of three renewable energy projects from Renova Energia ("Renova") by TerraForm Global, SunEdison entered into a put/call agreement that obligates SUNE to repurchase 7 million shares of GLBL from Renova at a price equal to the lesser of $15/share or 54.48 Brazilian Reals/share." At a U.S. Dollar/Brazil Real exchange rate of $.28, 54.48 reals would equal $15.25 per share. SUNE's liability under the put would therefore be $15/per share or $105 million and it would be payable within 60 days. At current market prices, 7 million shares of GLBL are worth approximately $21 million. Renova is a creditor in the SUNE bankruptcy under the put agreement, but, given the likely dire outcome for unsecured creditors, Renova will remain an owner of these shares.

No GLBL Liability Under the Renova Energia Put

GLBL is not a party to the put agreement between Renova Energia and SUNE. It has no liability and no obligation to purchase the shares from Renova Energia. Unless it chooses to liquidate its position in the secondary market, Renova will continue to own 20.3 million shares of GLBL and have a seat on the GLBL board.

Termination of the ESPRA Acquisition

The exercise of the Renova put was not a surprise given the disparity between the put price and the then prevailing market value of the GLBL shares. What was a surprise was the additional disclosure by Renova that the sale to GLBL of three small hydro projects with a cumulative capacity of 42 MWs, known as ESPRA, had been terminated April 4th in return for a termination fee of $10 million paid by GLBL to Renova. On page 12 of its Q3 10-Q, Global estimated the purchase price of ESPRA as $33.2 million.

So why did GLBL pay $10 million to terminate a transaction that would only cost another $22 million to close? Is it a signal of liquidity concerns at GLBL or was it just an uneconomic deal that the suddenly more independent yieldco decided to walk away from in return for a pretty steep termination fee relative to the equity purchase price?

There is very little information about the economics of the project in the public domain beyond the estimated revenue per kwh for the Eletrobras PPAs of approximately $40/MWh less a $9.50/MWh risk premium paid to the regulator for a guaranteed offtake at an average capacity of 18.8 MW as detailed on page 24 of Renova's 2014 Sustainability Report. In other words, Renova pays the regulator to lock in minimum revenues and not be exposed to drought (hydrological) risk.

The guaranteed offtake provides an approximately 45% minimum capacity factor for ESPRA. Assuming an average capacity factor of 50%, ESPRA would generate about $5.6 million of annual revenue. This is pretty weak beer on a project with an equity purchase price of $33.2 million and approximately $27 million of 12% project debt outstanding. GLBL has an extremely high cost of capital based on its current stock price and the 9.75% interest rate on its Senior Notes at issuance. It cannot afford to be investing scarce capital at rates of return below its cost of capital. The termination therefore was probably driven by poor project economics with concerns over liquidity as a secondary factor (see the credit facility discussion below).

Very Positive News on the Banco do Brasil Liens

Renova Energia Investor Relations confirmed to me via e-mail that the Banco do Brasil liens on the Salvador and Bahia wind projects were released in January. The liens secured Renova corporate debt and tied up an estimated $58 million per year in CAFD per page 5 of GLBL's Q3 2015 earnings presentation. The $58 million of CAFD from Salvador and Bahia represents approximately 42% of the $139.1 million of run rate CAFD estimated in the GLBL Q3 earnings presentation. Adjusted for the expected loss of GLBL Senior Note interest payment support of approximately $80 million due under the Interest Payment Agreement with SUNE, Salvador and Bahia would represent almost 100% of the projected GLBL CAFD (see table below for adjusted CAFD estimate). Given the material nature of the release, it is surprising that GLBL has not disclosed it in an SEC release.

GLBL 8-K Disclosures: Alto Cielo

GLBL filed an 8-K on April 8th that provided an update on the Solarpack project (good news) and the BioTherm acquisition (possibly bad news disguised as a status quo announcement).

The Solarpack acquisition was listed on page 7 of GLBL's 3Q 2015 Earnings Presentation (see link above). The solar project is called Alto Cielo and has a capacity of 26.4 MWs. The project was acquired for $35.4 million. Per GLBL's S-1 filed in anticipation of its IPO: "(t)he project has a U.S.-dollar denominated PPA with the UTE. UTE's obligations are guaranteed by the Government of Uruguay. The PPA expires in the fourth quarter of 2043. The PPA has a base price of $111.00/MWh (as of August 2012) and also provides an incentive for the project interconnecting prior to Dec. 31, 2015. The PPA for this project has no base price escalation."

Per the April 8th 8-K, Alto Cielo entered commercial operation in March of 2016 so it would not have received the PPA incentive. Assuming an 18% capacity factor (this study provides some support for this assumpton), revenue would be about $4.6 million per year.

GLBL has not provided a CAFD estimate for the project but, based on the estimated revenue and an estimate of operating costs of about $11/mwh of generation, Alto Cielo would generate about $4.1 million before debt service and income taxes. Assuming project debt of $20 million at 5% with a mortgage style amortization, the CAFD before taxes would be about $2.5 million.

This is not a great return on the $35.4 million equity purchase price and it exhibits once again how overly aggressive SUNE management was while bidding on acquisitions and PPAs. At least the offtaker credit for Alto Cielo is investment grade (Baa2) and the PPA is denominated in dollars.

GLBL 8-K Disclosures: Biotherm

The Biotherm Acquisition disclosure is a bit more involved. GLBL IR has indicated that the Purchase and Sale Agreement for this acquisition was never filed with the SEC. I have accumulated some information on the projects and in my next article I will provide analyze the implications of GLBL failing to close on the timeline disclosed in the April 8th 8-K.

Repurchase of 9.75% Senior Notes

GLBL filed an 8-K April 22nd that disclosed that it repurchased $49.8 million in 9.75% Senior Notes for $40 million plus $2.3 million in prepayment fees and accrued but unpaid interest (most of this amount was accrued interest). The purchases occurred December 2015 and January 2016. It begs the question why? Why would a company with 1) a failing parent that had just fleeced it for $231 million, 2) significant outstanding acquisition obligations (Globeleq and ESPRA), and 3) a need to invest in profitable renewable energy projects in order to boost CAFD to meet its minimum dividend target with the stepdown in interest payments in 2017 under its Interest Payment Agreement with SUNE (see link above) use precious capital to repurchase senior notes?

A simple explanation for the repurchase could have been that GLBL was in danger of failing its Credit Agreement Leverage Test at Dec. 31, 2015. Based on the definitions in the Credit Agreement, the test ratio would equal Borrower Total Debt (essentially the Senior Notes) less unrestricted cash divided by the Cash Flow Available for Debt Service ("CFADS"). CFADS equals CAFD plus the Fixed Charges. The fixed charges for the four quarterly periods ended December 31st, 2015, is defined by the Credit Agreement as $19.7 million per quarter. CAFD for the first three quarters of 2015 is also defined by the Credit Agreement and is listed in the table below.

Calculation of Leverage Ratio
Period Ended December 31st, 2015
1Q $76.5
2Q $43.2
3Q $52.8
4Q (1) $32.5
Total CAFD $205.0
Fixed Charges (2) $78.8
CFADS $283.8
Max Leverage Ratio (3) 5.5
Maximum Net Debt $1,560.9
(1) Based on annualized estimate of CAFD from GLBL 3Q Earnings Presentation
(2) Defined in Credit Agreement
(3) Leverage Covenant adjusted upwards by .5 during any quarter in which an acquisition occurs.

So the CFADS for the four quarters ended Dec. 31, 2015, as defined by the Credit Agreement, would have supported up to $1.56 billion of net debt. Prior to the repurchases that occurred in December 2015, there was $810 million of outstanding Senior Notes and at least $650 million of unrestricted cash (adjusted for the India projects acquisition, FERSA acquisition, dividends, deleveraging, etc). Net debt was therefore approximately $150 million. The CFADS to Fixed Charges ratio was approximately 3.6x, easily exceeding the 1.75 minimum required (see below). So the repurchases were not executed to squeak through a covenant test.

Was there something rotten in the state of Denmark when this repurchase was done? Was this just another clever way of SUNE getting additional funds out of GLBL without a related party transaction? Is it possible that GLBL repurchased these notes from an institutional investor and the institutional investor then reinvested the funds in the second lien financing? This is complete speculation on my part and exhibits a degree of mistrust bordering on paranoia, perhaps, but there is something that does not jibe with this Senior Note buyback.

There would be several definable benefits for the institutional investor: 1) it would become a secured creditor (secured by the shares of both TERP and GLBL and the equity of the various project companies at the SUNE level), 2) it would realize significant cash from the egregious origination fees charged by the second lien lenders, 3) it would realize cash from the exercise of the warrants allocated to the lenders, and 4) it would receive a vastly higher interest rate as measured by its net cash exposure under the loan to SUNE.

In hindsight, the institution may not think it was such a great deal, but in December and January, the economics of the transaction were probably tantalizing. There are other possible reasons for the Senior Note repurchase but a plain vanilla repurchase without ulterior motives seems highly unlikely.

No Credit Facility Extension Disclosure in 8-K

GLBL is in technical default under its Credit Agreement (section 5.1.c) for failure to file its annual report within 90 days of its year end. This is similar to the technical default of its sister company TerraForm Power (NASDAQ:TERP) under its Credit Agreement. The primary lenders under the GLBL and TERP facilities are the same (the Joint Lead Arrangers and Joint Lead Bookrunner positions swap positions under the two Credit Agreements) and the covenants of the Credit Agreements are identical. TERP previously disclosed that it had agreed to an extension of its annual report filing deadline with its lenders but no such disclosure was included in either of GLBL's recent 8-Ks. The Board of Directors, CFO and IR officer are the same for GLBL and TERP so why the difference in disclosure regarding a potential default under the Credit Agreement?

The most likely explanation is that GLBL, in addition to the technical default noted above, will also, due to SUNE's default under the Interest Payment Agreement, come very close to failing the Debt Service Coverage Ratio test detailed in Section 6.7.a of the Credit Agreement: "Borrower shall not permit the Debt Service Coverage Ratio as of the last day of any Fiscal Quarter, beginning with the Fiscal Quarter ending December 31, 2015, to be less than 1.75:1.00."

The Debt Service Coverage Ratio is defined as CFADS divided by Fixed Charges. Assuming that the Fixed Charges are limited to the interest expense on the approximately $760 million of Senior Notes that remain outstanding after the recent repurchase (see above), Fixed Charges would be approximately $74.1 million on an annualized basis. This would require CFADS of $129.7 million.

The problem for GLBL is that the $139 million of annualized CAFD projected in the 3Q Earnings Presentation includes the $80 million of interest payment support from SUNE. The loss of the interest support payments reduces CAFD to $59 million. Add back the $74.1 million of Fixed Charges results in CFADS of $133.1 million. Adjusted upwards for the expected CAFD contributions from Alto Cielo and the 36 MWs of Thai solar plants that were dropped down in February, GLBL probably has about $8 million of CAFD margin to absorb what will likely be a pretty stiff increase in General and Admin expenses due to the SUNE bankruptcy. My conclusion is that GLBL's lenders are attempting to dramatically reduce the size of the Credit Agreement while GLBL is in technical default.

Conclusion

GLBL's access to its bank line to purchase additional projects is likely to be vastly constricted even after it files financial statements and eliminates the technical default under its Credit Agreement. It will rely on its cash on hand for liquidity (which should be more than sufficient) and this will limit its ability to invest and grow CAFD. This is a first in a series of articles that I will write regarding GLBL. In upcoming articles, I will discuss the impact of the SUNE bankruptcy on GLBL's operations and corporate governance, update GLBL's projection of 2016 CAFD, and project GLBL's sustainable near-term dividend.

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