How Wall Street’s Favorite Solar Company Spent Itself to the Brink

Source: By Brian Eckhouse, Bloomberg • Posted: Friday, April 1, 2016

Just nine months ago, SunEdison Inc. was Wall Street’s favorite clean-energy company. It sopped up every dollar it could come by to finance a breathtaking buying binge of wind and solar farms, and in the process became the world’s largest renewable-energy company.

Now, SunEdison is teetering on the verge of bankruptcy protection, its stock below $1. The company’s fall is largely its own doing, the almost inevitable result of an ascent that was built on financial engineering and cheap debt. But it had plenty of enablers in the form of bankers, who pocketed fees with each acquisition, and investors, who reaped attractive dividends in a protracted stretch of low interest rates.

Even “smart, thoughtful and skeptical hedge funds” bought SunEdison’s story, said Gordon Johnson, an analyst at Axiom Capital Management Inc. “It’s not just management’s fault, it’s not just their hubris. They just began to drink their own Kool-Aid.”

SunEdision faces potential technical defaults on at least $1.4 billion in loans and credit facilities if it fails Wednesday to either obtain waivers from lenders or file its already-delayed 2015 annual report. The prospect of bankruptcy protection, which has shadowed SunEdison for much of this year, was acknowledged March 29 by a company it controls, TerraForm Global Inc. In a filing, TerraForm said “there is a substantial risk that SunEdison will soon seek bankruptcy protection,” citing its parent’s “liquidity difficulties.”

Ben Harborne, a SunEdison spokesman, declined to comment.

Commodity Prices

Renewable-energy companies have largely struggled since mid-2015, in part due to depressed commodity prices that hurt the energy industries broadly. SunEdison is the only U.S.-based developer inching toward bankruptcy protection.

Founded in 2003, SunEdison helped pioneer “no money down solar,” according to its founder and original chief executive officer, Jigar Shah. In 2009, MEMC Electronic Materials Inc. — a manufacturer of silicon wafers used to make solar cells — bought SunEdison, which was then among North America’s largest solar energy services providers. MEMC changed its name to SunEdison in 2013, reflecting the boom in renewable energy.

Financing Technique

SunEdison’s acquisition spree began in 2014, taking advantage of a financing technique used by renewable-energy developers known as yieldcos. These publicly traded companies are set up to buy their parents’ wind and solar farms. When they work, the parents get needed cash to build more clean-energy projects, and yieldco shareholders get a steady dividend flow.

But the arrangement can also push developers to buy more and more assets to sustain growth, according to analysts.

“There was a perceived high-growth rate built in that wasn’t sustainable,” said Paul Bradley, the chief financial officer of Toronto-based independent power company Northland Power Inc. “It was too good to be true.”

In June and early July alone, SunEdison announced or closed four acquisitions. Investors applauded the moves, pushing the shares to $31.66 on July 20, just 47 cents below its June peak.

But it was on that day that SunEdison — after a 19-month, $2.6 billion spending spree — announced that it would pay a 52 percent premium for Vivint Solar Inc. Not only would that be SunEdison’s most expensive acquisition, valued then at $2.2 billion, it also sent the company in a different direction. While SunEdison had become known for selling directly to utilities, Vivint offers rooftop solar systems to homeowners.

Big Deal

The investor backlash was immediate. Homeowners aren’t perceived as reliable a source of revenue as top-rated utilities. And the sheer size of the deal forced investors to wonder if SunEdison had bitten off more than it could chew, putting in question the acquisitive strategy that they had championed. In an instant, the Maryland Heights, Missouri-based developer went from do-no-wrong in investors’ eyes to can’t-do-right.

SunEdison’s stock fell sharply, a move that continued in late 2015 when David Einhorn’s Greenlight Capital cut its stake after sustaining heavy losses. Third Point, the hedge fund firm run by Daniel Loeb, sold its entire position in the third quarter, 12.4 million shares.

Balance Sheet

Ever since, SunEdison has shifted from one quixotic fix-it to the next to shore up its balance sheet. In December, SunEdison agreed to extinguish $336 million in debt by transferring more than 1 gigawatt of solar assets to three creditors. SunEdison had bought some of these assets earlier in the year.

In January, David Tepper’s Appaloosa Management LP, which owns 9.5 percent of another SunEdison yieldco unit, TerraForm Power Inc., sued to block the Vivint deal. Appaloosa claimed that SunEdison’s plan to flip the rooftop solar’s operating assets to TerraForm Power was “fundamentally unfair” to the yieldco’s investors. A judge declined Feb. 25 to issue an injunction to stop the deal.

Just four days later, questions arose over SunEdison’s assets and accounting. The company announced Feb. 29 that it was delaying the filing of its 2015 annual report, citing an internal audit committee’s investigation into the “accuracy of its anticipated financial position” and weak accounting controls.

The delay prompted lenders to yank financing supporting the deal, which may have led to Vivint scrapping it March 7. Vivint has sued SunEdison for damages.

As analysts assess SunEdison’s rapid fall, many cite its growth-at-all-costs strategy.

“They got greedy,” said Michael Morosi, an analyst at Avondale Partners LLC in Nashville. “They asked public investors to pay $1.50 for something that private investors valued at $1.”