Shares of SunEdison Inc. SUNE gained nearly 10% in last Thursday's shortened trading day after it revealed in a SEC filing that it is likely to secure a new financing.
According to the filing, the beleaguered solar company has been in talks with investors and lenders regarding a $650 million second-lien credit facility. If all goes well, part of the net proceed will be used to repay an existing second-lien credit facility.
It is to be noted that SunEdison has been struggling to finance its projects because of the tremendous debt burden incurred due to a string of buyouts made over the past one year.
SunEdison has been on an acquisition spree since the last year to strengthen its position as a renewable energy developer. To diversify its portfolio, the company acquired First Wind and Solar Grid Storage. It started going downhill after announcing an agreement to acquire Vivint Solar Inc. VSLR in a cash-stock deal worth $2.2 billion.
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.
The negative operating cash flow indicates that SunEdison has not been able to generate enough cash to cover the operational costs and, so, had to raise more debt.
Furthermore, the disappointing third-quarter results by SunEdison’s YieldCos – TerraForm Power TERP and TerraForm Global GLBL – have added to investors’ concerns. A YieldCo is a publicly-traded company formed to own operating assets that produce cash flow, which is then distributed among investors through dividends.
In other words, YieldCos buy finished projects developed by the parent company, thereby freeing up capital to spend on more projects. A parent company with a highly leveraged balance sheet has difficulty completing projects, while a cash-strapped YieldCo has difficulty paying off its financers. SunEdison is facing trouble on both the fronts.
All these factors have led SunEdison’s shares to plunge over 82% from its 52-week high of $33.45 attained on Jul 20.
However, SunEdison has gained some value over the past few weeks supported by a series of initiatives undertaken to improve the liquidity position, such as lowering its offer price for the Vivint Solar buyout and quitting the development projects in Brazil.
Nonetheless, we believe that much needs to be done to improve SunEdison’s liquidity position. We do not expect this Zacks Rank #3 (Hold) stock to gain much in the near future.
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