SunEdison fall from grace complete as it files for bankruptcy protection

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Former solar giant SunEdison has filed for US bankruptcy protection, the culmination of a dramatic downward spiral variously attributed to hubris, overreaching ambition and a mismanaged acquisition strategy.

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US solar manufacturing giant SunEdison – once the largest renewable energy developer in the world – has filed for bankruptcy protection, the culmination of a dramatic downward spiral that has been variously attributed to hubris, overreaching ambition and a mismanaged acquisition strategy.

The Wall Street Journal reports that the former solar market darling, which was worth nearly $10 billion in mid-2015, will use the bankruptcy process to reduce its debt, which has ballooned to more than $16 billion.

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A rough 12 months for SunEdison. Source: Bloomberg

“Our decision to initiate a court-supervised restructuring was a difficult but important step to address our immediate liquidity issues,” said chief executive Ahmad Chatila. “The court process will allow us to right-size our balance sheet and reduce our debt.”

SunEdison subsidiaries TerraForm Power and TerraForm Global – two separate, publicly traded entities known as Yieldcos that buy operating projects from SunEdison and pay out cash flow to their shareholders – did not file for bankruptcy, however, and said in statements they had sufficient liquidity to continue to operate.

Interestingly, Barrons reports that shares in the two Yieldcos actually jumped after the SunEdison announcement, by 5 per cent and 10 per cent respectively by mid-afternoon trading on Thursday.

However, Bloomberg New Energy Finance has cautioned that if yieldcos are to make a return, they will need to have a management team that is not directly affiliated with a developer, and which investors trust to serve their interests exclusively.

As we wrote here in March, when reports first emerged that SunEdison was nearing bankruptcy, the beginning of the end for the company is widely considered to be the $2 billion deal to buy Vivint Solar’s portfolio of residential rooftop PV assets.

SunEdison chief Ahmad Chatila pictured during happier times with Vivant CEO Greg Butterfield. Source: Twitter
SunEdison chief Ahmad Chatila pictured during happier times with Vivant CEO Greg Butterfield. Source: Twitter

The deal – which was characterised by a major investor as “an unfortunate departure” from SunEdison’s business model – went spectacularly awry, and its failure is now the subject of an investor lawsuit, and investigations by both the US SEC and Department of Justice.

In the Australian market, SunEdison made significant inroads through its 2014 acquisition of local solar installer Energy Matters – a deal that was sealed soon after the US company secured $70 million of finance from the Clean Energy Finance Corp towards a major Australian solar leasing initiative.

More recently, it was named as the co-developer with Australia’s Solar Choice of the proposed 2GW Bulli Creek mega solar project in south-west Queensland, tipped to be the largest in the world once fully developed.

Construction of the project, which has planning approval for a staged deployment of up to 2GW over eight years, was tipped to start mid-way through the year, depending on the success of negotiations for a power purchase agreement.

How this and other projects might be affected by SunEdison filing for a Chapter 11 is unclear. The WSJ reported in March that creditors were “likely to take control of the company and its portfolio of power projects.”

SunEdison listed assets of $20.7 billion in court papers. BNEF’s head solar analyst Jenny Chase said there was “plenty of value in the project pipeline, which ultimately comprises cash-generating assets not linked to the continued existence of SunEdison.”

But she added that investors would take time to do the due diligence to value these projects correctly before handing over cash for them.

“Some projects, like the portfolio in Andhra Pradesh, India at the lowest-ever tariff of INR 4.63/kWh ($70/MWh), may be difficult to build at a profit due to the extremely competitive prices they were bid at,” she said.

Here is some more of what is being written about SunEdison’s bankruptcy filing today:

“SunEdison’s bankruptcy says more about the company’s strategic decisions than about the solar industry as a whole. Comparable companies SunPower and First Solar have managed a develop-and-sell business profitably over the past three years,” said Bloomberg New Energy Finance head of solar Jenny Chase.

“What has distinguished SunEdison has been the relentless and unfocused pursuit of growth, in which it has invested vast amounts of borrowed money. Not all of its ventures succeeded, which is inevitable in the project development business, but SunEdison’s win to loss ratio was evidently insufficient. It borrowed a lot of money and lost it – or at least tied it up in projects at various degrees of completion, which it needs to sell to realise the gains and pay back creditors. On the eve of the bankruptcy filing, these projects were for sale,” Chase said.

“The news, and SunEdison’s rock bottom share price, will no doubt have deep effects on the growing global solar and clean energy industries. But SunEdison’s downfall isn’t rooted in the failure of solar and wind,” wrote Katie Fehrenbacher on Fortune.

“Instead the company’s tale of woe stems from overreaching ambition and core business decisions that led it to try to grow too big, too fast, and in too many directions. Companies in any industry—from drugs to mining to airlines—could, and have met, the same fate.”

“It was a magic money machine,” said Gordon Johnson, an analyst at boutique broker Axiom Capital, about SunEdison’s ill-fated business model. “If you were investing in SunEdison, you were betting that the thirst for yield was going to be good for a while.

“After piling into the company as its shares soared starting in 2012, hedge funds were blindsided by the impact of the collapse of energy prices last year, which prompted SunEdison’s initial dip last summer. The company’s ill-fated agreement to buy Vivint Solar  in July pushed it into free-fall, from which it never recovered.

“Now, it does seem like something of a graveyard” for hedge funds, Johnson told Bloomberg.

“The past 12 months have been rough on many US solar power companies, including SunPower and Elon Musk’s SolarCity, but SunEdison is the only one to have blown up in such a spectacular fashion,” said the Financial Times. “The root cause of this is its complex financial structure.

“In a presentation to analysts in February last year, (CEO Chatila) suggested SunEdison was taking a tilt at the world’s most valuable energy company, ExxonMobil. …A blitz of deals, fuelled by soaring debts, was intended to bring the company closer to realising that ambition. Instead, it sent it plunging to earth.”

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