The issues surrounding the SunEdison (OTCPK:SUNEQ) bankruptcy and its effects on the sponsored yieldcos have led to a large amount of speculation as to the solvency of the yieldcos. The yieldcos have begun to give disclosures supporting the bull thesis for GLBL and providing context for the SUNEQ bankruptcy. There are now compelling reasons to believe that GLBL will come out of the current situation a better company with a great deal of value to offer shareholders who buy in at current prices.
While the SunEdison bankruptcy is shaking out to be a complicated mess, there is one thing that is clear about the SUNEQ relationship to GLBL: GLBL is not part of the SUNEQ bankruptcy and will most likely not become a part of the bankruptcy. In a rating action issued by Moody's on 4/28/16, the ratings service stated that the consolidation of the yieldcos into a SUNEQ bankruptcy was remote given the fact that the companies have operated as clearly separate legal entities with their own boards, capital structures and financing documents.
TerraForm Global released disclosures on 7/19/16, adding more certainty to this rating action, stating that GLBL is in active discussions with SunEdison about selling the SUNEQ interest in GLBL. The probability of consolidation is remote, and the analysis of outcomes if that were to occur is beyond the scope of this article.
Instead, this article will focus on certain questions that could have a material effect on GLBL. The questions raised include:
- What is the status of the GLBL financials, and will they be filed before required deadlines to remain in compliance with their corporate debt covenants and NASDAQ requirements?
- Can SUNEQ continue to support GLBL within the requirements of the "Interest Support Agreement"?
- Can SUNEQ continue to support GLBL within the requirements of the "Support Agreement" in regard to drop-downs and future project acquisitions by GLBL?
- Will SUNEQ be able to keep the class B shares, which it has not paid for through the support promised in the "Interest Support Agreement" and the "Support Agreement"?
- What is the impact to dividends if the class B shares are sold in bankruptcy and immediately converted to class A shares in the process?
- Did SUNEQ commit fraud in securing the $231 million of payments from GLBL for the 425 MW India projects, and will GLBL be able to recover these payments on non-delivery of the India projects?
SunEdison is responsible for the back office management of Global and that includes the generation of GLBL's quarterly and annual financials. The SUNEQ bankruptcy has led to the delay of filing the financials and created a great deal of uncertainty in regard to the status of GLBL. GLBL is currently in violation of its corporate debt covenants and has until 8/29/16 to remedy the situation by filing its delayed financials for the fourth quarter. Furthermore, it is also in violation of NASDAQ listing requirements and has until 9/26/16 to cure the NASDAQ violation.
There are compelling reasons to believe that it is in SUNEQ's best interest to ensure that the financials get filed. SUNEQ owns 61 million shares of class B stock that, converted to class A shares, are worth $203 million as of 7/19/16. Delivery of the financials would likely show GLBL as operating just fine in light of the bankruptcy and will help SUNEQ claim higher value on its shares, improving its position in the bankruptcy. The latest release from GLBL lends credence to the idea that SUNEQ is seeking to maximize the value of GLBL, and filing the financials is one component of value maximization.
Calculation of CAFD Concerns
Prior to the new disclosures, many investors were concerned about the legitimacy of the CAFD calculations given the large negative cash from operations indicated by the company in 3Q2015. There are a few pieces of information to keep in mind when looking at CAFD and the operations of GLBL.
The first is that GLBL carries a large cash balance created by a large debt balance. The new disclosures indicate a 1Q2016 ending cash balance of $787 million while its debt burden sits at approximately $1.2 billion.
This debt balance exists to grow the business of GLBL. This is also why the "Interest Support Agreement" exists between SUNEQ and GLBL, to help support the current CAFD while the company invests its cash in project assets. The new disclosures confirm that SUNEQ delivered on its "Interest Support Agreement" in 1Q2016. Whether it continues to deliver on the support agreement is in many ways irrelevant. If SUNEQ does not continue to deliver on its support agreement, GLBL will be able to deleverage the company and be able to support its CAFD near current levels.
Contributions received pursuant to agreements with SunEdison are almost the same as CAFD, these contributions are part of the "Interest Support Agreement" between SUNEQ and GLBL that are designed to keep CAFD within a certain range while GLBL deploys the cash available on its balance sheet. A loss of the "Interest Support Agreement" means that CAFD drops temporarily until GLBL deleverages the balance sheet or invests the cash on the balance sheet.
The next point is that midpoint guidance of the company's unaudited financials shows cash from operations as distinctly positive and trending higher. This is in contrast to the 3Q2015 financials where cash from operations was hindered by costs related to the IPO and related financing. This new midpoint guidance shows how the company is operating in a normalized post-IPO environment.
Finally, Global's midpoint reconciliation of cash from operations to CAFD points to a deceleration of changes in its operating assets and liabilities as operations at GLBL normalize from its pre-IPO and IPO period.
All of this points to a CAFD projection that appears to be within reason and viable over the long term for GLBL.
SUNEQ Support of GLBL, Potential Fraud, and Continued Support
The remaining questions, two through six, are well known and outstanding, but an analysis of the implications of each item is missing. Instead of addressing each issue in turn, I've build models that outline the potential impact to the GLBL dividend, CAFD, and balance sheet position given different assumptions.
There is limited financial information for GLBL post IPO with only one complete 10-Q filed, but new disclosures shed light on its continuing operations and debt burden. Instead of using the cash flow, income, and balance sheets in their entirety to make forecasts, which would require many questionable assumptions, I've elected to do all of the modeling based on CAFD, quarter-end cash balances, and all disclosures that have been made to the public since its last 10-Q filing. Using CAFD also requires a number of assumptions, but these assumptions are easier to analyze.
The first assumption made is that the all disclosures are representative of the CAFD potential for GLBL going forward. I also assume that CAFD is a fair approximation for cash generated and added to the balance sheet when dividends are not paid. The next assumption made is that all material uses of cash have been disclosed to shareholders. Because of the lack of forward guidance, I value the stock based on a normalized dividend yield. I assume a normalized dividend yield of 8%. For the sake of comparison, the Global X YieldCo Index ETF (NASDAQ:YLCO) currently pays a yield of 5.7%.
I also assume that all remedies to the current situation are completed in 3Q2016 or 4Q2016. There are two reasons for this. The first is because there is a great deal of uncertainty surrounding future asset drop downs and much of that uncertainty could very well be rectified when the 10-K is filed. The second is for simplicity. The models start with the best-case scenario and show progressively worse outcomes.
The first model is a baseline that assumes everything returns to normal with the current asset base. This is obviously a best-case scenario, but illustrates that there is substantial value in the yieldco with the current asset base and arrangement with SUNEQ. If SUNEQ successfully reorganizes out of Chapter 11 bankruptcy, then this is a plausible outcome. If everything goes back to normal, then SUNEQ should be able to perform on the support agreements and the minimum required dividend becomes sustainable. While this is an upside scenario, new disclosures indicate that SUNEQ may be gearing up for a sale of the class B shares.
The next scenario brings GLBL to a situation where management has not dealt with its debt situation or large cash balances while a number of negative outcomes have come to fruition. Here I assume that GLBL loses the interest support from SUNEQ, the dividend gets paid, the money for the 425 MW India projects is returned, but the class B shares are sold and converted, diluting the class A shareholders.
When looking at this scenario, it's important to recognize that the reason GLBL carries so much debt is to purchase assets and grow the business. The interest burden significantly affects the level of CAFD delivered in the business without growth. This is one of the reasons that GLBL has an interest support agreement and why that interest support tapers down every year. While this scenario concludes with a stock price below current prices, it also indicates that GLBL has over $1 billion in dry powder to grow the business.
The final scenario looks at GLBL as if SUNEQ failed to do everything imaginable and Global is forced to repurchase all of its outstanding corporate debt as well as half of its project debt. The additional assumptions made are that the dividend is suspended until the final quarter of the year to preserve cash, interest support from SUNEQ is lost, $231 million from the India projects is not returned, and the class B shares are converted to class A shares.
Another fundamental assumption made is that the Goldman Sachs (NYSE:GS) revolver is maintained and used to pay off the corporate debt. Goldman Sachs modified the revolver agreement with GLBL on 5/6/16 after the bankruptcy filing of SUNEQ, but did not substantially reduce the amount that Global could draw on the revolver. This supports the position that Goldman Sachs maintains confidence in the underlying operations of GLBL.
Under this scenario, the company reinstates its dividend in the fourth quarter with a minimal cash balance and pays out 85% of its CAFD with the remainder used to recapitalize the balance sheet and gear up for new growth.
Risk Factors and Conclusion
While investing in GLBL comes with considerable risk, new disclosures made by the company on 7/19/16 show that the fundamental business is intact. Even with these disclosures, there are many questions left open in the wake of the SUNEQ bankruptcy filing. The answers to these questions will bring to them huge differences in valuation for GLBL. At the same time, there is a small but not negligible probability that the value of GLBL goes to zero if it gets roped into the SUNEQ bankruptcy. The flipside is that even in some of the worst-case scenarios that keep GLBL alive, the stock is worth north of $6 a share. In more positive situations, the stock is worth closer to $12 a share. These scenarios represent upside potential of 50 to 200%.
Disclaimer: This article is intended for informational purposes only, is not a recommendation of any sort, and should be viewed with skepticism. Please do your own due diligence before purchasing any stocks mentioned in this article.
Disclosure: I am/we are long GLBL.
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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