Why SUNE Stock Was Hammered
Although SunEdison, Inc. (NYSE:SUNE) is getting absolutely battered by the markets at the moment, don’t count the company out just yet. SUNE stock could rise from the ashes if the firm can quell investor fears that a bankruptcy is not on the horizon.
I admit that’s a tough sell right now. SunEdison stock has never sunk so low as this before, down to roughly $3.02 from $32.13 in late June. How could things have gone so terribly wrong? How could the broader market suddenly price SUNE stock so cheaply?
I mean, companies rise and fall all the time, but a 90.6% fall in six months? That either sounds like SunEdison is disintegrating or something entirely different is happening. You’ve probably read the former case elsewhere, so let’s explore what the other story could be.
Restructuring SunEdison’s Debt
But first, some specifics for readers who are unfamiliar with the core issue here. SunEdison recently restructured its debt into a new mixed pack of debt and equity, which would be considered a wise decision under normal circumstances.
However, many investors, including some key hedge fund managers, were upset at the terms of the deal. In particular, they took exception to some portions of the new debt that needed to be serviced at more than 10%. They think the cost of capital is simply too high. (Source: “SunEdison Announces Pricing Of $725 Million Of Second Lien Secured Term Loans,” SunEdison, Inc. Investor Relations site, January 7, 2016.)
The combined cost of SunEdison’s debt is about 4.13%, which far exceeds the levels at other solar energy firms. At the same time, the company is trending towards its low-margin activities, such as building plants and then selling them to third parties. (Source: “SunEdison Inc. Form 10-Q Filing,” Securities & Exchange Commission web site, November 9, 2015.)
This strategy typically brings in less money than if SunEdison were to continue to operate the plant. So when the shift to low-margin activities is viewed in contrast to the rise in high-interest borrowing, many analysts arrive at the conclusion that SUNE stock is doomed.
However, that analysis leaves out two important factors:
Firstly, selling to a third party may be a low-margin activity, but it provides bigger upfront cash infusions, which is helpful when tackling heavy debt loads. Moreover, the buyers are likely SunEdison’s two subsidiary yieldcos, meaning there is a greater amount of certainty in the deals.
Secondly, the new debt package probably wasn’t the final step in SunEdison’s plan. The company was trying desperately to weather the slump in energy prices, but it had been overstretched in expansion mode. From my vantage point, restructuring the debt looks like an interim point in the overall trajectory.
After launching a few more projects and making full use of the company’s Vivint acquisition, SunEdison could refinance its debt at a lower interest rate, thus making repayment more manageable.
SUNE Stock Outlook for 2016
There are so many reasons to turn against this remarkable company, but it’s more the victim of bad timing than anything else. And I see that as an opportunity.
As investors, we try to see the hidden value of a company, not get swept away by mob rule. I say “hidden value,” because finding a great business is useless if other investors have already priced in its true worth. And that’s why I’m still bullish on SUNE stock.
I’m not entirely convinced this debt package marks an end for SunEdison, Inc. In fact, I see it as a stepping-stone to redemption and huge returns for holders of SUNE stock.