It seems that the roller coaster ride for SunEdison Inc. SUNE which started last year is not going to end in the near future. Despite ringing in the New Year with a 13% jump, shares of the renewable energy developer nosedived more than 39% yesterday after the announcement of several complex and expensive moves to reduce debt.
Highlights of Debt Restructuring
SunEdison revealed that it is offering a $725 million second lien loan comprising of $500 million of A1 loans and $225 million of A2 loans. Both the loans, to mature on Jul 2, 2018, carry an interest rate of LIBOR+10%. The loan also includes 28.7 million shares worth of warrants.
This loan is part of its series of exchange agreements with certain holders of its Convertible Senior Notes due 2018, 2020, 2022 and 2025 and Perpetual Convertible Preferred Stock (the "2018 Notes," "2020 Notes," "2022 Notes," "2025 Notes," and "Preferred Stock," respectively).
The company intends to use part of the net proceeds to repay the existing $170 million second lien credit. The remaining will be utilized for the payment of interests, transaction costs and general corporate purposes.
Also, $580 million worth of notes will be traded for a $225 million note due in 2018, plus 28 million common shares. Finally, 11.8 million common shares will be traded for $158.3 million in preferred stock.
What Triggered the Sell-off?
According to Bloomberg, though the aforementioned deals will increase SunEdison’s net debt position by $42 million, it will add $555 million to liquidity — a very positive strategy for a cash-strapped company.
Then what made investors sell the stock? The high cost SunEdison is incurring to enhance liquidity.
Citing Sven Eenmaa, an analyst at Stifel Financial Corp., Bloomberg revealed that the new transaction will increase SunEdison’s annual interest expenses by about $40 million. The financial data provider also stated that this will dilute existing shareholders by approximately 18%.
Conclusion
It is to be noted that SunEdison has been struggling to finance its projects due to the tremendous debt burden it incurred because of the string of buyouts, including First Wind and Solar Grid Storage, made over the past one year.
The situation worsened in July last year when SunEdison entered into a definitive agreement to acquire Vivint Solar Inc. VSLR in a cash-stock deal worth $2.2 billion. The deal made investors increasingly cautious about its rising debt pressure.
These acquisitions, once believed to be strategic, are now burning a hole in SunEdison’s pocket. The acquisitions have taken a toll on its balance sheet with total outstanding debt (including current portion) nearly doubling to $11.7 billion at the end of third-quarter 2015 from $6.3 billion a year ago.
Although SunEdison has taken a series of initiatives, such as lowering its offer price for the Vivint Solar buyout and quitting the development projects in Brazil, to improve the liquidity position, we don’t see any material impact on its balance sheet.
Further, we believe that with the recent sell-off, it will become difficult for SunEdison to raise more funds for project financing. Therefore, as the going gets tough for the company, we would advise investors to stay away from this Zacks Rank #3 (Hold) stock for now.
Meanwhile, investors may consider some better-ranked stocks in the broader technology sector such as Diodes Incorporated DIOD, Integrated Device Technology Inc. IDTI and Mellanox Technologies Ltd. (MLNX). All these stocks sport a Zacks Rank #1 (Strong Buy).
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