Wendell: You know, there might not have been no money.
Ed Tom Bell: That’s possible.
Wendell: But you don’t believe it.
Ed Tom Bell: No. Probably I don’t.
Wendell: It’s a mess, ain’t it, sheriff?
Ed Tom Bell: If it ain’t, it’ll do till the mess gets here.
No Country for Old Men is in both my all-time favorite movie and book lists.
No doubt about it, SUNE is a mess.
I’ve been motorcycling the last week across Death Valley, Yosemite (in the snow, which I would not recommend) and now back in San Diego. Sun & Internet! My dear friends, I’ve missed you so. (And BTW fellow adventurers, if you do these out-of-the-way trips, T-mobile is completely worthless.)
Back to SUNE. Worries exploded recently when CreditSights argued that the fall in TERP means that SunEdison now faces a margin call on a $410 million loan. SUNE later confirmed that it had paid $152 M to satisfy the call.
Yesterday the same analysts highlighted what appears to be a reclassification of more than $700 million worth of debt from “non-recourse” to “recourse,” meaning the company’s lenders now have access to additional SUNE collateral:
When updating our SunEdison debt tracking spreadsheet we noticed SunEdison subtelety [sic] reclassified its $403 million Margin Loan and $336 million Exchangeable Notes as suddenly recourse switching … from the non-recourse disclosure used in the [second quarter of 2015] 10-Q filing. We are not accountants and realize this might be sufficient disclosure but we are fairly confident many investors missed the dropped foornote “(a)” … It is also entirely possible this is just a typo but since SunEdison stopped returning our emails and phone calls over a month ago we have no way to confirm this.
Shocked –shocked– I am, that SUNE management isn’t returning calls/emails to CreditSights. That said, management’s behavior is probably the core issue with how the market is valuing SUNE right now, and it’s fixable.
This recourse debt probably has more to do with why the stock is down -34% today (TERP -21%!) than all the headline news that Einhorn, Loeb, Mandel and Cooperman have reduced or eliminated their holdings. The market clearly believes SUNE is in the midst of a full blown margin call on TERP, and with about $12 billion of debt on its balance sheet, with some $3 billion of that amount listed as recourse to the company, per Deutsche Bank, it’s hard to know where the bottom will be.
From my perspective, the only thing that’s changed are the probabilities. I finally have a 2% position at a basis of ~$4.5. Even though it looks increasingly likely this is going lower –perhaps all the way lower– I can’t lose any more than 2% of my capital on this SUNE trade. (Full disclosure, I also have 1% TERP at $11.07, so really it’s 3%).
Does this suck? Yes.
Do I think the market may be wrong about SUNE insolvency? Yes, but it’s sure not looking so great, is it? That said, if this isn’t negative sentiment, it’ll do till it gets here. (Anything – anything! – remotely positive comes out — even a “hey there y’all, we stayin’ in bidness!”– and how long a ride do you think the shorts are in for?)
Do I still think SUNE has positive optionality? IF it gets through this, clearly yes, but with what we know today, SUNE is probably not something you want to double down on right now:
Anton Chigurh: What’s the most you ever lost on a coin toss.
Gas Station Proprietor: Sir?
Anton Chigurh: The most. You ever lost. On a coin toss.
Gas Station Proprietor: I don’t know. I couldn’t say.
[Chigurh flips a quarter from the change on the counter and covers it with his hand]Anton Chigurh: Call it.
Gas Station Proprietor: Call it?
Anton Chigurh: Yes.
Gas Station Proprietor: For what?
Anton Chigurh: Just call it.
Gas Station Proprietor: Well, we need to know what we’re calling it for here.
Anton Chigurh: You need to call it. I can’t call it for you. It wouldn’t be fair.
Gas Station Proprietor: I didn’t put nothin’ up.
Anton Chigurh: Yes, you did. You’ve been putting it up your whole life you just didn’t know it. You know what date is on this coin?
Anton Chigurh: 1958. It’s been traveling twenty-two years to get here. And now it’s here. And it’s either heads or tails. And you have to say. Call it.
Gas Station Proprietor: Look, I need to know what I stand to win.
Anton Chigurh: Everything.
Gas Station Proprietor: How’s that?
Anton Chigurh: You stand to win everything. Call it.
Gas Station Proprietor: Alright. Heads then.
[Chigurh removes his hand, revealing the coin is indeed heads]Anton Chigurh: Well done.
[the gas station proprietor nervously takes the quarter with the small pile of change he’s apparently won while Chigurh starts out]Anton Chigurh: Don’t put it in your pocket, sir. Don’t put it in your pocket. It’s your lucky quarter.
Gas Station Proprietor: Where do you want me to put it?
Anton Chigurh: Anywhere not in your pocket. Where it’ll get mixed in with the others and become just a coin. Which it is.
[Chigurh leaves and the gas station proprietor stares at him as he walks out]
Investing is tough business, yes? Einhorn, Loeb, Mandel & Cooperman are pretty smart guys who rode this down, what, 70%?
Howard Marks likes to say if you’re going to outperform, you have to go in a different direction than the herd, you have to concentrate, leverage, and be willing to lose. I agree, but you gotta’ know *when* and *what* to go to the mat for, or you’re going to get killed.
The most important thing about this whole series of posts on SUNE should be how much risk management discipline matters.
No matter what I deem the probabilities to be –e.g. the disruption the next 10 years represents to the carbon-based economy of the last 150 years– now is not the time to go all-in on SUNE, even though it’s both the largest global renewable energy development company AND the world’s largest renewable energy asset manager that is trading like it’s insolvent. (There may be a time, however, when this deserves more capital. Look for an upcoming post as to what conditions would need to look like in order to get me to invest more.)
I took a bike ride for a week across California as this thing dropped ~40% and didn’t lose any sleep. The equity is trading like an option and priced as if it’s going bankrupt. If it does go to zero, I’ll take my lumps –publicly– and try even harder to make up for it by finding the right play on the long term CAGR and TAM that renewable energy represents. (Along with, maybe, a way to exploit the longterm decline of fossil-related energy.)
Good luck out there. I’m rooting for us.
Very cool.
Great post! Loving you work.