Brian Wuebbels, SunEdison’s former chief investment officer, was attempting to ease investor fears about the company’s rapid growth when he announced last October that SunEdison would stop selling assets to its yieldcos.
“The plan for next year is that we will drop no assets into TerraForm [Power] or into [TerraForm] Global,” he said on a call to shareholders, reversing the debt-fuelled strategy that made SunEdison the largest renewable energy provider in the world.
But it was too late. SunEdison filed for Chapter 11 bankruptcy seven months later with $16.1 billion in liabilities. In the immediate aftermath, many wondered how the company’s precipitous fall from grace came about. The general consensus is ambition and financial engineering.
SunEdison was on a mission to expand. In 2012, it added 430MW of solar capacity. In 2014, it added 1GW. The company, led by chief executive Ahmad Chatila since 2009, was closing on overpriced deals “like it’s going out of style”, according to one investor in the renewable industry.
To finance its growth, SunEdison balanced steady cashflows with accumulating debt and financial innovation. The publicly traded yieldcos, TerraForm Power and Global, are an example of the latter. Both were created to buy SunEdison developed operational assets, using third-party investor capital, and send the proceeds and cashflows back to its parent.
SunEdison also agreed to a number of private warehouse facilities with big-name investors like First Reserve, Macquarie Capital, John Hancock and Goldman Sachs. In these, the investors would provide debt and equity to fund asset construction and purchases and hold them until SunEdison was ready to assume control and drop them down to its yieldcos.
With these frameworks in place, SunEdison closed its two largest deals in 2015 – the $2.4 billion First Wind acquisition early in the year and the $1.9 billion Vivint Solar buyout that July. But the latter ended up being the tipping point, even before its March collapse, shattering investor confidence and precipitating a share price fall for SunEdison that led to its capitulation in April.
As SunEdison moves through bankruptcy, the question has shifted from how did this happen to what happens next for its yieldcos and outstanding warehouse assets.
SunEdison had over $3 billion of financing available through its warehouse facilities. In 2010, First Reserve, a Connecticut-based infrastructure investor, set up the first warehouse with SunEdison for $1.5 billion. Macquarie Capital and insurance company John Hancock established one last June for $525 million and Goldman Sachs created a $1 billion warehouse in August. In September, JPMorgan agreed to a “strategic partnership” with SunEdison that, while not a warehouse in name, appeared similar.
Sources close to the facilities say several of the warehouses were nowhere close to fully drawn, but there are still assets in them with an uncertain future.
Take First Reserve, for example. The company filed with the Federal Energy Regulatory Agency on 28 April to take full ownership of the 156MW Comanche solar project in Colorado, which is being held in its warehouse with SunEdison.
“If First Reserve owns the warehouse and SunEdison has nothing to do with it, they sell the assets and they get the cash from it and that’s it,” explains Swami Venkataraman, a vice-president and senior credit officer at Moody’s.
The situation benefits both SunEdison and the warehouse investor. In this case, First Reserve gets control of an operating renewable asset to keep or sell and SunEdison is able to wipe the project from its balance sheet.
If SunEdison tried to keep the asset itself, it would find it hard to make its money back. “Value in bankruptcy is a lot different than value in a normal market,” says Jay Indyke, chair of corporate restructuring and bankruptcy at law firm Cooley. “If you’re selling assets under distress that depresses the market value of the assets.”
It’s less clear what will happen to the TerraForm yieldcos, with a lot depending on whether they get sucked into bankruptcy proceedings.
Creditors and SunEdison itself have a lot of say in this. SunEdison has a 34 percent interest in TerraForm Power and Global and owns 100 percent of Class B shares. It also has the power to name all of the directors on the TerraForm boards. The companies themselves are not insolvent, Venkataraman says, so it is unlikely SunEdison would want to pull its yieldcos down with it. But there are three scenarios where this could happen anyway.
The first is the TerraForms failing to file their 2015 financial statements. Both companies have filed for delays with the US Securities and Exchange Commission, citing “unreasonable effort and expense,” which is likely to be due to SunEdison not filing its own report. “At some point, the revolving credit facility lenders, it’s possible they may be unwilling to keep extending this deadline,” Venkataraman argues. If this happens, the companies will default and be forced to pay off hundreds of millions of debt six years earlier than planned.
The second bankruptcy threat to the TerraForms is at the project level, where assets are still generating steady cashflows, but rely on SunEdison for operation, maintenance and administrative management such as power purchase agreements. According to Venkataraman, the projects should be fine, but a technical default related to SunEdison’s bankruptcy could trigger lenders to impose conditions that disrupt the flow of cash to the yieldcos.
The third way the TerraForms could enter bankruptcy is if SunEdison’s lenders petition the bankruptcy judge to order a substantive consolidation. Venkataraman believes substantive consolidation is “more the exception than the rule” and is something the TerraForm boards would oppose. However, “it’s possible for a judge to conclude that the best way forward is to simply bring the TerraForm companies into the SunEdison bankruptcy,” he warns.
Indyke explains that consolidating entities is used to “treat the assets as one and to treat the liabilities as one”. However, he says this can “run afoul” of what benefits certain creditors. “There might be significant assets at one level where there might be less creditors. And they may feel they’ll get a higher percentage recovery if you kept the company separate than if you consolidated them.”
The most obvious reason why the TerraForms can avoid bankruptcy is that they can pay their bills. That is why TerraForm shareholders would object to filing for bankruptcy. “It would be hard for the board of TerraForm companies to decide that they would have to file TerraForm into bankruptcy when clearly those companies are not insolvent at all,” Venkataraman states.
However, there is a threat that collateral damage from SunEdison’s unraveling, such as project-level debt default, could cause problems for the companies in the weeks ahead. According to Venkataraman, “their immediate strategy would be to stay out of the bankruptcy”.
What the TerraForms look like after is not entirely clear. One possible scenario is they could become a “static portfolio”, where debt is paid down and cashflows continue to come from its assets. Another option is for the TerraForms to merge with a restructured SunEdison after bankruptcy. The TerraForms could also cut ties with SunEdison altogether.
Venkataraman concludes: “When they have the ability to survive on their own, let’s say to file their own financial statement, to have their own management, things like that – when that confidence is back, then they can start thinking about the next steps.”