Sunedison shares slipped by as much as 1.81% to $7.05 per share today in spite of a blog post from Bronte Capital’s John Hempton revealing that his firm has taken a long position. Indeed, it’s a very interesting post because while Hempton is long on the solar company, he comes across as being pretty negative on it (unless you read all the way through to the very end), which may be why shares are moving lower.
Bronte considers solar stocks
In the August letter to Amalthea Fund investors, the folks at Bronte Capital focused on what they called “the Sun Edison complex.” They considered the reasoning behind why solar stocks have gotten hammered lately. Then the firm bought a long position in Sunedison, with Hempton explaining that they bought the stake after the first and second “stages” of collapse in the company.
He added that they had been seeing small profits from that long position until about a week ago, but that changed after the company’s stock fell further. Hempton called the decline in Sunedson shares “spectacular,” adding that First Solar and SolarCity “have had issues – but nothing like this.”
Nonetheless, he thinks Sunedison is a good long bet, and joins many prominent hedge funds in that assumption.
What’s wrong with Sunedison
Much of today’s blog post deals with the problems Sunedison is facing. For example, Hempton pointed out that large solar projects like the ones Sunedison typically takes on are “massively” capital intensive. He compared these projects to “utility scale power generation where you have to pay for the next 25 years of fuel upfront.” He added that while such projects bring large amounts of debt, they create “reliable high margin cash flow.”
Further, he noted that there’s a “pretty obvious” conflict of interest in the way Sunedison’s YieldCo dropdowns are done. He said some of their successful short positions have been in companies he thinks sold overpriced assets to “captive vehicles.”
Third, he said, “Because of the related parties and the copious amounts of different types of debt these companies have complex and even scary accounts.” He added that they have an issue with this part of Sunedson even as they are “quite good at getting to the bottom of complex accounts.”
Sunedison a “trust me” story
Hempton said since the collapse of solar stocks began, they’ve been trying to understand the severity of it. For Sunedison, he thinks it’s about the large amounts of debt, the complexity of the accounts, and Vivint acquisition.
He also pointed to tweets referring to Sunedison as “Sun Enron,” but he believes all of the arguments for this case are just wrong and more fear mongering than anything else. He said that even though the company is highly levered and complex, he believes the past deals it has made have been “good” ones.” Over the last three to five years, the solar farm deals that have been struck have worked out. Prices for solar panels and interest rates are lower now than past estimates would have assumed, and Hempton “would be enormously surprised” if Sunedison’s past deals didn’t end up working out.
What about the future deals?
Of course it remains to be seen whether Sunedison will continue making such strong deals. In order to improve its chances, he suggests that the company work on improving its relationship with the capital markets. If management doesn’t do this, he doesn’t think they will be able to strike good deals going forward.
He also urged Solaredison and other solar companies with YieldCos in general to improve their communications with investors. It’s true that operating leverage is important in the industry, so these companies must report how much they spend on components for their solar farms because it illustrates how much profitability the companies have.
However, YieldCos are non-bank financial companies, and the big trend right now is for solar companies to create their own YieldCos to finance their massively capital intensive solar projects. According to Hempton, non-bank financial firms “blow up” because of credit risk, mismatches in duration or unstable funding.
Pricing in insolvency for Sunedison?
In determining whether Sunedison’s YieldCo, TerraForm Power, is doing OK, Hempton said it’s necessary to look at the credit risk on Sunedison’s projects and how funding for project development can “roll into long-dated funding.” He believes Sunedison is doing alright in this respect but that Wall Street is very worried about it, even pricing in a high risk of insolvency. Because of this pricing in, he sees Sunedison as a good long position.
He notes that there are some areas in which the funding of Sunedison’s projects is not very transparent because of its complexity. However, he also said that of what they have seen, it looks like the solar company is doing just fine and not at a high risk of insolvency.