This stock is being recommended heavily by Kent Moors over at Money Morning. Just thought I would share his latest update on SUNE. I certainly don't rely on these guys like gospel, but they tend to have a decent track record. I just can't figure out if this article was written simply to justify a poor recommendation, or if he genuinely expects this to pop out of it's current undervalued territory. (Originally recommended to purchase in the $3.30 area.)
March 24, 2016
The Latest on SUNE - the Next Few Days Will Be Critical
By Dr. Kent Moors
SunEdison Inc. (SUNE) has taken a beating lately, on the back of rumors (from a single source - Debtwire) that it's looking for emergency financing.
Now, we originally added SunEdison to the Energy Advantage Portfolio because, as the world's largest developer of renewable energy, as well as the U.S. market leader in the design, installation, and financing of solar power, it is at the center of the rapidly growing - 39% in 2015 - global solar revolution.
SunEdison's assets and global presence are simply unbeatable. For example, the company built the largest military solar plant ever (16.4 MW of power on 170 acres of land) at the Davis-Monthan Air Force Base in California. SunEdison's portfolio also includes several other military projects, as well as solar power plants in Chile, Italy, South Africa, India, and many other countries.
Of course, this rapid international expansion requires leverage - taking out loans to finance further development.
That's not a bad thing. The oil industry, for example, has operated like this for decades. But high leverage does make companies vulnerable to external "shocks."
For the oil industry, that was the collapse in oil prices since late 2014. For SunEdison, it was the unintended side-effects of the company's pioneering "yieldco" structure.
SUNE's yieldco subsidiaries, as you've seen here in Energy Advantage before, are daughter-companies to which SunEdison sells revenue-producing assets (finished solar power projects). In return, SUNE gets up-front cash that it can use to develop even more solar power plants.
Unfortunately, SunEdison's management failed to anticipate how the complex financing relationships between SUNE and the yieldcos might create investors with very different interests.
Shareholders in the yieldcos, for example, might well try to use their influence to lower the price SunEdison gets for selling assets to its subsidiaries. This is what David Tepper's Appaloosa Management, a hedge fund with a 9.5% holding in one of the yieldcos, tried to do earlier this year.
This put SUNE under financial pressure, driving down its share price.
These investors, of course, failed to realize that by driving down SUNE, they would eventually hit the yieldcos hard too. After all, the value of SUNE depends in part on its ability to sell assets to its yieldcos, while the value of the yieldcos depends on increasing their revenue flow by buying more assets from SunEdison. Both sides need the other to do well.
The end result is that the investors that pushed SUNE down also overextended themselves, and ended up putting both SunEdison and the yieldcos into massively oversold territory.
Now, let me be clear: it is in no one's interest that SUNE go bankrupt. SunEdison shareholders would lose money, of course. But so would the company's creditors, as their debt (and their ability to turn SUNE's very valuable assets into cash) would be stuck in courts for years.
Neither would yieldco shareholders or creditors benefit, as the value of those companies is so tightly linked to SunEdison itself. In addition, yieldcos are new and legally untested - were SUNE to find itself in bankruptcy court, the value (and ownership) of yieldco assets would also come under legal scrutiny.
That could take years to clear up.
In short, if SunEdison goes bankrupt, no one gets paid. So it's in everybody's interest to resolve this amicably.
Which brings us to the current situation.
Everyone's Waiting for March 30
Rumors have been swirling that SunEdison is in talks with creditors for additional "debtor-in-possession" financing - a kind of credit usually restricted to companies in need of short-term cash.
First, note that these rumors remain unconfirmed.
Second, with the company this undervalued, this is just the kind of situation where new, outside money could come in and scoop up both equity and debt at prices significantly below the true value of these assets.
Remember, the company's problems are short-term. The larger picture remains overwhelmingly positive. Solar power is growing and will continue to grow - estimates put U.S. solar power's 2016 growth at 80% - and SunEdison remains perfectly position to profit.
Unfortunately, there is a roadblock to both additional financing: SunEdison's annual report.
The company has now delayed filing this report with the SEC twice, citing first an internal audit and then faulty IT controls on their internal reporting. This means that creditors, shareholders, and anyone thinking about going in is in the dark.
Now, March 30 is effectively the company's final deadline for filing this report. That's when, as Bloomberg reports, $1.4 billion in debt could be called into technical default.
I say "could," because while failure to file by that date gives SUNE's creditors the right to call a default, it's not in their interests to do so. As you saw above, that would tie their debt up in courts for years, with little hope of getting much back.
They would be much better off extending the credit lines instead.
Of course, nothing's guaranteed. Even successful financial firms have been known to shoot themselves in the foot before.
High Risk - But Potentially High Reward
So that's where we are now. The severely underpriced SunEdison presents an opportunity for existing or new money to scoop up equity and debt on the cheap, giving the company the chance to move past recent events.
Were this to happen, you would see an immediate pop in share prices - a double or more in days.
Of course, that depends on the company filing their annual report by March 30 - which is what we're waiting for now.
Now, if you're uncomfortable with that level of risk, you may want to take moves to preserve your equity. But if you have the risk-capital, and SunEdison succeeds in securing new financing, this could ultimately deliver life-changing gains.
I'm following this intently, and will keep you up-to-date as we approach this deadline.
Sincerely,
Kent
AI
