SUNEDISON (SUNE): IT’S ALWAYS DARKEST BEFORE THE DAWN

Solar is a big, and getting bigger, exponentially. 2014 saw 45 GW of capacity installed globally, 2015 will see 50+ GW and from 2017 onwards 70+ GW, as far as the eye can see. Coal’s cremation oven may be nat gas powered near term, but the PATH Act of 2015 which extends the US tax credits for “renewables” by 5 years puts a lot of wind in the sail of both wind ($35bln over 5 years) and  solar (+38bln) installations.

SunEdison, equity ticker SUNE, is the the world’s largest renewable energy development company. The company develops, finances, installs, owns and operates renewable power plants, delivering predictably priced electricity to its residential, commercial, government and utility customers. SunEdison is one of the largest renewable energy asset managers and provides customers with asset management, operations and maintenance, monitoring and reporting services.

As a play on the sector, I recommend owning SunEdison (disclosure: long equity & vetting purchase of Series A 6.75% Perpetual Convertible Preferred Shares). Other names that get discussed as if they are independent include TeraForm Power (TERP) and TeraForm Global (GLBL) which are publicly listed, SunEdison sponsored YieldCos. The YieldCo model was used by SunEdison to broaden the menu of securities available to yield starved end investors (MLP 2.0). In addition to 3rd party sales and warehouse drop-downs, the YieldCos give SunEdison another outlet for on-going deal financing. Of SunEdison’s $20.7bln in assets at the end of Q3 15′, $5.5bln are housed in TERP and $2.9bln are with GLBL. A confluence of events, including too much too soon in terms of planned growth (6 GW backlog), ill-timed acquisitions (Vivint, et al) and tightening financial conditions almost resulted in a “lights out” scenario for SUNE equity holders in Q4 15′. The stock recently traded sub $3 from a 2015 high of $32 and currently stands at $6.51 ($2bln market cap). SunEdison is a complex company for certain, and one must put in the hours to understand the subtle nuances, both stand alone and versus peers.

There are a few factors that could give new investors pause when considering allocating fresh capital to the renewables sector via SunEdison.

1.) Hedge fund involvement. Hedge funds are all over this trade, via various components of the capital structure like its the head table at a Robin Hood Foundation dinner gala.

Greenlight Capital’s Einhorn has had the longest standing involvement from the long equity side with a 4%+ stake in SUNE. David certainly has drunk his share of the cool aid on this story, some would assert via a funnel. A $34 sum of the parts valuation may need to get pared but even 1/2 that at $17 is a near triple from here. The interweb has his Q3 Shareholder Letter laying out why Greenlight remains long.

Appaloosa Management’s David Tepper recently disclosed a 9% + stake in TerraForm Power (TERP) via both equity and senior debt and is taking an activist role. Sifting through the two missives sent to date it is difficult to see Mr. Tepper’s end game, yet. SUNE, as Sponsor and an equity holder in TERP has little incentive to drop down lower quality assets to TERP. When assets are funded via SunEdisons 4 available warehouses via drop downs the company retains the right to buy the assets back within 5 years and the YieldCo has right of first refusal (via call rights). What is likely over time is that SunEdison creates a 3rd YieldCo, TerraForm Resi to house US residential renewable assets which Tepper sees, rightly so, as lower quality vis-a-vis commercial (typically investment grade), government (printing press) and utility (regulated) customers.

2.) The degree and swiftness of the recent stress evident in SunEdison’s debt security prices. SunEdison has total debt of approx. $12bln, of which $4-5bln is full recourse. SunEdison has $1.9bln Convertible Senior Debt. In August 2015 the company issued $650mm of Convertible Perpetual Preferred Stock with a par value of $1,000. The ticker for the prefs is SDSNP and the cusip is 86732Y208. The prefs closed last Friday at $424 (15.9% yield), up 8% from the previous close and well off recent lows of $200 (33.75% yield for those that caught the bottom print, with a going concern assumption of course). When the prefs were issued in August 15′ SUNE was trading at $14.68 and the initial pref conversion price was set at $17.62. The company has the right to convert holders to SUNE equity after Sept. 6, 2020 if SUNE trades at >130% of the $17.62 ($22.91) for 20 of 30 consecutive trading days.

3.) Short interest in SUNE >40% float. SUNE has a traded float of 271mm shares and 119mm are held short. Rather than naked shorts, I believe the bulk of the short positions were put on as a hedge against the convertible bonds, previously noted. Convertible arbitrage is meant to be a “market neutral” trade whereby you buy the convert and short the amount of shares you expect to eventually be converted into. Busted or broken converts, as they are also referred, is a speciality segment of the distressed market. The bonds tend to trade much more like bonds and less like an equity hybrid once the equity trades <50% of the conversion price. SunEdison’s earlier maturity converts have a conversion price in the mid teens and the most recent convertible prefs at $17.62. While not in the prudent category, trapped longs (of the convert) might consider covering their equity short and letting the convert run once the stock gets real legs on  an executable medium term strategy and the nitrous provided by the Path Act 2015 passage (soon to be forthcoming).

Those preferring to “buy the blob” rather than selecting individual names can buy the Guggenheim Solar ETF TAN which tracks the MAC Global Solar Energy Index (the top 10 names make up 62%). This is really the only game in town in terms of size (just shy of $300mm) and volume averaging 200k shares per day. I have some issues with TAN in that it only has a 37% USA domiciled solar weighting, and it includes Solar City (SCTY) at a 4.8% weighting. I’m in Chanos’ Kynikos Assoc. camp on SCTY, where he is short. He is offside on his SCTY short, but claims he would short more if there was sufficient borrow available. Chanos nailed the VALE short early (2012) from the mid 20’s in price terms and I rarely fade his high convictions short positions.

The US has a vested interest in being the global leader in the renewables space. The Department of Defence (DoD) is the biggest single energy user in the country (Army, Navy, Marine Corps, Air Force and Coast Guard) and is one of the largest consumers of energy in the world. Expect to see a wave of new government contracts in this space. Many green projects have been completed and more will be put to bid to both modernize and improve the efficiency of military installations both at home an abroad. Military housing, long privatized, but effectively credit wrapped through the Basic Allowance for Housing (BAH) annual appropriation from the US Federal Government is another large potential growth pocket. Even Mr. Tepper could get his head around that risk profile. JCG

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