SunEdison shares fell into a nosedive on Wednesday after reports that it was in debtor-in-possession negotiations with some second lien term loan holders. However, it wasn’t just SunEdison stock that was impacted by those reports. SolarCity and other companies in the rooftop solar industry also saw their shares plunge on Wednesday as analysts from at least one firm warned that if SunEdison ends up filing for Chapter 11 bankruptcy, it would be bad for the entire rooftop solar industry.
Solar stocks impacted by SunEdison news
SunEdison stock continued to tumble today, falling by as much as 4.72% to $1.21 per share. SolarCity managed to bounce back today, however, possibly on the news that SpaceX, which is run by its chairman, Elon Musk, has sunk another $90 million into it through the purchase of more bounds. SolarCity stock climbed by as much as 4.16% to $23.29 per share.
TerraForm Power shares declined by as much as 3.68% to $8.38 today, while TerraForm Global stock declined by as much as 3.12% to $2.64. Both companies serve as yieldcos for SunEdison.
SunEdison may file for bankruptcy
Debtwire was the first to report that SunEdison was talking with creditors on its A-1 and A-2 second lien term loans that are due in 2018. The loans are worth $728 million and bear an interest rate of LIBOR plus 1,000 basis points. The report also indicated that the solar firm was unable to settle the talks about problems with liquidity and leverage out of court and thus began debtor-in-possession talks with those creditors. Debtor-in-possession negotiations are the next step when a debtor fails to settle its debts out of court with creditors.
Axiom analyst Gordon L. Johnson II describes these negotiations as: “If a company needs a loan, but a potential lender is unwilling to make it (due, mainly, to concerns around legal challenges), the Bankruptcy Code offers a way in which the lender can circumvent legal challenges from other creditors.” He added that in most cases, they do this through a Chapter 11 bankruptcy in which lenders are given a “first priority security interest, a market/ premium interest rate, approved budget, and other lender protections.”
What might happen to SunEdison?
Doing this would enable SunEdison to get debtor-in-possession financing to secure the liquidity needed for a sale or to finance restructuring under Chapter 11. Johnson explains that if the company is able to acquire this funding, it would push the priority of most of its capital structure much lower. As a result, stockholders could end up at the bottom of the heap and “the least likely to be made whole.”
He also said that this situation suggests that SunEdison is in a “dire” cash position or even that it might be totally compromised. He maintains his Sell rating on the company’s stock and cut his price target from 39 cents to 22 cents per share.
What could this do to the rest of the rooftop solar industry?
Johnson stated that SunEdison did not respond to his request for comment on the report about the supposed debtor-in-position talks. The Axiom analyst added that if the company ends up having to liquidate some of the projects from its backlog of 5.5 gigawatts through a bankruptcy, he sees a potentially “debilitating” impact on the U.S. solar market. He doesn’t explain what potential implications he sees, however.
On the flip side, he said a white knight buyer might step up to acquire SunEdison. He also suggests that the company could start selling its projects with cash returns of 9% to 10%, or an activist investor might step into TerraForm Power and essentially push its stock up, which in turn would boost SunEdison’s value.