Janet Yellen Brought Down SUNE Stock
You should partly blame the Federal Reserve for the collapse of SunEdison Inc (NASDAQ:SUNE), which moved into Chapter 11 bankruptcy last Thursday, as the solar momentum play finally felt the brunt of massive debt on its operations. SUNE stock had exploded and grew much bigger via the availability of cheap money in the system—a result of the Fed’s easy monetary policies.
The stock had been trading at over $33.00 per share in July 2015, prior to plummeting to a last trade of $0.34.
Now, you can blame SunEdison for piling on the debt through some ill-advised moves in its lofty ambitions to accelerate its growth, but it was made that much easier via the Fed’s low interest rates.
In its Chapter 11 filing, SunEdison reported debts of a whopping $16.1 billion and assets of $20.7 billion.
While the net difference of about $4.0 billion may not seem like a big deal, the problem was SunEdison likely paid too much for some of its acquisitions. Hence, the real adjusted value if the company had to sell the assets would likely be much lower.
The reality is that carrying that much debt on the balance sheet is not easy. It allows little wiggle room for SUNE stock, especially as solar products steadily decline in price.
For example, when SunEdison acquired First Wind Holdings LLC in November 2014, the company paid $2.4 billion. The belief was that the addition would make SUNE into a behemoth and global powerhouse in wind power.
While the premise was correct, there were two problems: 1) the decline in oil prices made alternative energy plays less attractive, and 2) the price paid was simply excessive.
Growth Is Crippling Companies
But with interest rates at near zero at that time, the financing was cheap and not easy to overlook. Unfortunately, deals like First Wind inevitably led to SunEdison’s demise.
The irony is that the aggressive growth pursued by SunEdison really faked out the majority of Wall Street and the big hedge funds that helped power the ascension of SUNE stock by buying shares by the boatload.
Jeffrey Osborne, a sell-side analyst at Cowen & Co., said the deal to buy First Wind was a “sound strategic move.” (Source: “SunEdison TerraForm to Acquire First Wind for $2.4 Billion,” Bloomberg, November 17, 2014.)
SUNE stock was trading at $17.00 when the deal was conceived, prior to ascending to over $30.00 in 2015.
Back in November 2014, West Texas Intermediate (WTI) oil was trading at around the $70.00 level and the desire for alternative energy was still pretty hot. There were not too many oil people who thought oil prices would eventually head to below $30.00.
The chart shows SUNE stock tracking oil prices lower beginning in July 2015 to the fateful end.
Chart courtesy of www.StockCharts.com
My concern is there will be more SunEdison-like stocks out there that are struggling with massive and unbearable debt loads, especially in the oil patch and other heavily leveraged sectors like solar and mining.
While the Fed continues to keep interest rates low, the scary thing is that once the Fed can no longer avoid raising rates, the upward push in financing costs will likely wreak havoc on many more companies like SunEdison.