SunEdison shares started to rally today following two upgrades on the news that the company had reduced its debt. One of the firms upgraded it even though they see the deal that reduced that debt as a bad one for shareholders. The other firm’s analysts are much more pleased with the capital raise even though they admit that it comes at a high price.
SunEdison rakes shareholders over the coals… again
SunEdison’s big announcement was that it had priced some second lien term loans worth $752 million and entered into some agreements with some holders of convertible senior notes due in 2018, 2020, 2022, and 2025. And some owners of perpetual convertible preferred stock. While the new capital raise does remove the near-term liquidity risk, it was also extremely expensive.
In a report dated Jan. 8, Axiom analyst Gordon Johnson II called SunEdison’s restructuring “another bad deal for shareholders. He downgraded the stock to Sell in November, and since then, shares tumbled 32% and have seen much volatility. Probably as a result of that pullback, he has upgraded the stock to Hold, although he maintains his $2 per share price target.
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SunEdison destroys shareholder value
Johnson believes the restructuring deal left shareholders “out in the cold” and described the headline SunEdison slapped on its press release as “cherry-picked.” The solar company highlighted the $738 million reduction in debt, which, while true, isn’t the entire story. Further, he said that there just isn’t a good way to spin the restructuring because he thinks the debt refinancing, which he believes came about as a result of demands made by some creditors, into shorter-term maturities with much higher borrowing costs doesn’t service shareholders’ interests in any way.
The Axiom analyst listed three reasons he thinks SunEdison has sucked shareholders dry of any value they might have. One is that suddenly the solar company’s debt balance climbs by a net $196 million when accounting for a net increase of $551 million in second lien loans. This is paired with a net decline of $355.1 million from exchange transactions.
Second, he said the company’s non-operating expenses climb by $50.8 million net per annum, including a $61.5 million increased debt service net, assuming that the Libor is benchmarked against the current one-year rate of 1.17%. This also comes with a $10.7 million decrease in preferred dividends, which is the amount equal to retiring 158,000 preferred shares for $1,000 per share price and at an interest rate of 6.75%.
And finally, the analyst said shareholders are taking a dilution on their shares of about 17.8%, assuming that warrants are exercised. He noted that the warrants on 28.7 million shares are pledged to the new second lienholders for 1 cent per share. This also includes an incremental addition of 39.8 million shares related to the exchange transactions, causing an 11.2% dilution if the warrants are not exercised.
Not all are unhappy about SunEdison’s capital raise
Avondale Partners analysts also upgraded SunEdison, raising their rating to Market Outperform and upping their price target from $6 to $7 per share. Indeed, they have taken the opposite view as Axiom and have heaped high praise on the firm’s management for the progress in restructuring the balance sheet. Further, they said the company’s “deeply distressed valuation does not reflect the value of its underlying assets.” Also they note that it now has more than $500 million in new cash on the heels of a $1.3 billion capital raise and debt exchange.
Their sunnier outlook appears to be because they expect SunEdison to be able to generate cash flow of up to $1 billion between now and the third quarter of 2018. Management has also moved to increase transparency – a step other companies have taken recently to much success.
SunEdison popular among hedge funds
It’s been a bumpy ride for SunEdison, and major hedge fund managers have taken up positions on both sides of the battle. Dan Loeb recently exited his long position, sending shares into a downward spiral. As recently as October, David Einhorn was long on the solar stock. January’s set of 13F filings will be very revealing on this stock, so batten down the hatches and prepare for an even bumpier ride as whenever a much-followed hedge fund manager moves on a stock like this, it tends to swing widely in either direction.
Shares of SunEdison climbed by as much as 7.81% to $3.59 per share during regular trading hours today.