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Sunedison (SUNE): Credit Event By 3Q16 Seen As Likely By Axiom

Sunedison shares bounced today before turning negative again on Wednesday following Tuesday’s plunge, which resulted from a combination of factors. High-profile investor Dan Loeb exited his position in the stock, while David Einhorn’s Greenlight Capital cut its holdings by about 25% (although offset by a position in TerraForm).

Shares of Sunedison and its YieldCo Terraform Power tanked also following a disappointing earnings report from Vivint Solar, which the two companies have struck a deal to acquire. Analysts from multiple firms are cutting their price targets, and Axiom has issued an ominous report on the solar firm entitled “The Nightmare Before Christmas.”

Sunedison sune terp crash again 11 17 2015
Via S&P CapIQ

Sunedison faces credit risk

In a report dated Nov. 18, analyst Gordon Johnson II and associate James Bardowski said the credit risk for Sunedison “appears worse-than-forebode.” They downgraded the company’s stock to Sell and set a $2 per share price target last week following a 75% decline. After another review of the solar firm’s 10-Q filing with the Securities and Exchange Commission, they’re even more worried.

For one thing, they said when excluding cash that Sunedison has committed to use for construction of its products, it has only about $600 million left for general corporate purposes. They don’t think that’s enough to keep the doors open through the second quarter of 2016.

They also believe that the decision to borrow $169 million in one-year paper in the third quarter at a high interest rate of 15.4% was due to a need for emergency cash because, as they said, “Who borrows 1yr paper at 15.4%?” They think the credit was taken because more collateral was needed by October for the $152 million margin call on the $410 million loan from Deutsche Bank in August. Further, they note that the decline in Terraform Power’s stock also suggests that Sunedison is desperate for cash.

Credit liabilities weighing on Sunedison

Other liabilities include the potential obligation Sunedison has to pay $250 million worth of its shares, which amounts to 83 million, for a 16% stake in Renova. The Axiom team notes that this suggests significant dilution through that offering. Also Renova has the right to place 7 million Technip shares at Sunedison for $15 per share as of the end of March 2016, which is a liability amounting to $105 million.

Also recently Terraform Power revealed that it had put up about 27% of the capital needed to fund the Invenergy Warehouse (or $388 million). The analysts say this implies that Sunedison aspires to have about $6 billion in Warehouse funds to hold the 3 gigawatts worth of projects that are currently under development and that it could need a cash infusion of about $1.65 billion.

As a result of all of these factors, the Axiom team thinks a credit event is likely even before the third quarter of next year—unless, of course, there ends up being an “unforeseen incremental cheap funding in the offing.”

Liquidity problems not imminent: JPMorgan

Interestingly, JPMorgan analyst Paul Coster and his team aren’t worried about liquidity problems at Sunedison. They maintained their Overweight ratings on both Sunedison and Terraform Power. They believe changing to a DevCo business model and resolving the acquisitions of Vivint and Invenergy will restore investor conference, especially if there is restructuring involved. Contrary to most other analysts, they epect the stock to rebound early next year.

They don’t believe the selloff in Sunedison and Terraform were warranted because they think a principal reduction is the most likely outcome from satisfying the need for collateral by paying down $31 million of the principal on the loan or posting 7.5 million Class B Terraform shares.

The JPMorgan team also notes that there is a risk that Terraform will have to buy projects from Vivint if the acquisition isn’t restructured and Sunedison files for bankruptcy. They added that a spokesperson for Terraform said the take/ pay agreement is just an interim deal between Terraform and Sunedison and is subject to change.

“Of course, there is an implied obligation to SUNE, but if SUNE goes bankrupt then the parent’s ability to deliver 450MW of projects is compromised and TERP’s obligation is moot,” they wrote in their report. “On the other hand if SUNE thrives and delivers on the 450MW development pipeline, TERP is only committed to the cash equity portion of the projects and is guaranteed access to these projects at FMV.”

Other firms slash their price targets for Sunedison

Axiom isn’t the only firm warning about trouble on the horizon. UBS analyst Julien Dumoulin-Smith and team cut their price target for Sunedison in half from $6 to $3 per share and maintained their Neutral rating on the stock. They say investors have scrutinized the deal with Vivint Solar and believe that Sunedison and its YieldCo Terraform are overpaying for it.

Vivint’s third quarter results didn’t help the matter any either, as its bookings fell quarter over quarter and its costs increased. Also Vivint must install more than 120 megawatts of capacity during the fourth quarter to reach the guide of 523 megawatts needed to be acquired by Terraform this year.

Deutsche Bank analyst Vishal Shah also sliced his price target for Sunedison in half, although he’s much more bullish compared to most other analysts. His target moves from $28 to $16 per share.

Sunedison short interest remains high

Unsurprisingly amidst all the problems, Sunedison remains a popular short position even though short interest has declined a bit recently. It fell from 91.5 million shares in mid-October to 87.1 million shares, which amounts to nearly 30% of the float, at the end of October..

Sunedison shares were down by 2.65% at $2.94 per share as of this writing, while Terraform Power shares were down 16.06% a $8.66 per share.