One of the worst keep secrets in the market in recent months has been that SunEdison was in trouble. The solar company is one of the pioneers and giants in the renewable energy space alongside companies like SolarCity. That’s where the comparison ends though, as SolarCity has run a prudent and cautious business, while SunEdison is drowning in debt. The company filed for bankruptcy earlier this week in a move that had been widely speculated for weeks.
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Sun’s problems stem fundamentally from too much debt and a lack of liquidity. Sun’s business strategy has been to build large capital-intensive assets like solar and wind farms and then sell the electricity generated from those facilities. That’s a fine business model and one that works well – if it is tightly controlled. In essence, Sun has some of the same business model structure and challenges of a conventional utility. But Sun faces two difficulties that conventional utilities don’t; the company does not have a local monopoly to sell electricity as many utilities do, and the company hindered its own flexibility though a massive surge in acquisition spending.
Sun spent billions on acquiring third party assets in the last few years, and then turned around and put those assets into subsidiary yieldcos. Those yieldcos, subsidiary companies holding assets from SunEdison and paying large dividends in general, were intended to help boost the multiple of SUNE stock. Instead, they ended up being a weight around the neck of the parent company by forming a costly and complex legal structure and making it more difficult for the firm to monetize assets as it ran into legal problems. Related: Eni Hopes To Develop Supergiant Gas Field By 2017
Subsidiaries TerraForm Power (TERP) and TerraForm Global (GLBL) remain standing and while the stocks in both subsidiaries have been hammered, both firms reassured shareholders that they are not planning to declare bankruptcy. Both firms have existing legal protections that should shield equity investors in the stocks from legal claims by SUNE creditors. Nonetheless, it’s obvious that SUNE’s bankruptcy is going to be a huge weight on both companies for the foreseeable future.
Beyond that, SunEdison itself is continuing to operate. The firm filed Chapter 11 bankruptcy so it is continuing its operations rather than liquidating in the hopes of gaining enough cash for shareholders. That’s the typical process for a large corporate bankruptcy, though the size and complexity of the SUNE Chapter 11 filing is anything but typical. Related: $91 Billion In Capex Cuts, A Serious Hangover For Oil
SunEdison listed assets of just under $21 billion and liabilities of $16.1 billion as of September 30, 2015, but it appears that the company has current liabilities of more than $50 billion. It’s clear then that a lot of unsecured debt holders are going to get a small fraction of what they are owed.
The company also faces dozens of lawsuits by shareholders. The reality is that in this bankruptcy, as in every major corporate bankruptcy for the last few decades or more, equity holders are going to be wiped out. Once the bankruptcy process takes place though – which will likely take years given the complexity of the case – SunEdison will reemerge as an operating entity. The firm’s Debtor-In-Possession financing will allow it to continue operating as normal for the time being. Indeed, SunEdison is sticking to its growth plans in India trying to build multiple new solar projects. SunEdison shareholders, who liked the company’s aggressive style of growth, are seeing that continue even after the stock itself is gone.
By Michael McDonald of Oilprice.com
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