More Downside to SUNE Stock?
Holders of SunEdison Inc (NYSE:SUNE) stock are on a rollercoaster ride as the stock, once again, takes a massive plunge after having surged a good 80% on Friday. It feels like a never-ending nightmare.
This time, the bad news might be worse than you think. SunEdison has not only delayed the submission of its annual report, but the company has also disclosed an ongoing internal investigation into its financials.
Pay attention to the words SunEdison used in the notification it sent out on Monday.
SunEdison revealed that an internal audit has been underway since the end of 2015, which is investigating the “accuracy of the company’s anticipated financial position previously disclosed.” (Source: “Notification of Late Filing,” Securities and Exchange Commission, February 29, 2016.)
The notification goes on to warn that if the allegations are found to be correct, the company may have to “reassess its liquidity position.” (Source: Ibid.)
Wait, did SunEdison just hint that it might not have enough sources to stay solvent? At least, that’s what the market understood.
I’ve mentioned this before that the bane of SunEdison’s existence is its own yieldcos—the special purpose entities (SPEs) it created to finance or acquire one unprofitable business after another. SunEdison’s complex inter-company transactions with its two yieldcos—TerraForm Power Inc (NASDAQ:TERP) and Terraform Global Inc (NASDAQ:GLBL)—have landed it in hot water.
Shareholders of these independently traded separate legal entities are now suing SunEdison for using undue influence over these yieldcos, to enter into transactions that were detrimental to their shareholders.
David Tepper’s lawsuit is currently the biggest threat to SunEdison. From what we know, Tepper, who holds a stake in TerraForm Power, is not backing off. (Source: “David Tepper Is Continuing His Lawuit With SunEdison,” Fortune, February 29, 2016.)
It is interesting to note here that not only SunEdison, but also even TerraForm Power has delayed its results. This further raises red flags on the relationship between the two companies. Ostensibly, if SunEdison fails, it won’t be altogether wrong to predict that the parent might be taking down with it its two yieldcos.
There is too much bad news surrounding SunEdison now. All of which beg one question: will it really go bankrupt?
Let me lay out my reasons for why I believe that’s not happening anytime soon…
First off, I’ve noticed something peculiar about the company’s insider trading. More of its insiders, particularly CEO Ahmed Chatila, have been buying the stock in the last three months. Now, who knows better about the company’s health than its insiders? If they are putting their money on the line, well that could only mean one thing: this ship is not sinking—at least not yet!
Secondly, we know now that the internal audit has been ongoing since the end of 2015, but nothing incriminating has so far been found. That should serve as some reassurance that nothing too unexpected will surface in the next two weeks either—that is, by March 15, when the company is expected to report.
Thirdly, activist hedge fund manager David Einhorn’s newly added board position at the company gives me hope that the company will survive through these headwinds. He holds a significant six-percent stake in the company and wouldn’t let it sink so easily.
The Bottom Line on SUNE Stock
SunEdison’s problems are real—the biggest being its yieldcos. Plus, the company’s debt-backed acquisition binge has brought it to the verge of collapse. The only way it can be saved now is if it takes two necessary steps: 1) to restructure its mounting debt and 2) to restrict its complicated ties with its yieldcos.
The company holds a strong portfolio of assets and still stands a good chance to grow from within. Shareholders may have to swallow this bitter pill short-term, but in the long run, the company might be able to get back on its feet.
Long story short: holders of SUNE stock must stand guard, but I don’t see a bankruptcy in the cards just yet.