SunEdison: A Wall Street Boom-and-Bust Story

SunEdison stock is a classic Wall Street boom-and-bust story, with shares rocketing over 2,000% before eventually losing almost all of their value. The volatility was largely driven by operational fluctuations attributable to deteriorating fundamentals in the solar industry.

SunEdison Inc., which builds and operates renewable power plants that use solar and wind energy, was bought by MEMC Electronic Materials in 2009. In 2013, MEMC adopted the SunEdison name to reflect a more concentrated focus on solar energy. After the company filed for bankruptcy in April 2016, SunEdison stock was delisted from the New York Stock Exchange, where it had previously traded under the tickers WFR and SUNE. SunEdison stock traded over-the-counter (OTC) under the ticker SUNQE before finally closing up shop.

SunEdison’s History

MEMC Electronic Materials, a supplier of silicon wafers to semiconductor and photovoltaic cell companies, entered the solar industry in 2006, and gained ground quickly in the solar wafer market by the following year. However, the company’s financial results raised alarm among investors in 2008, as it struggled with difficult conditions in the electronic wafer market. Sales fell and its gross margin was squeezed amid inventory overhangs and a difficult pricing environment.

MEMC Electronic Materials purchased privately held SunEdison LLC in 2009 for $200 million, deepening the firm’s exposure to the solar market. Results improved in 2010, though top- and bottom-line performance was still well below prior levels. This coincided with relative share price stability in SunEdison stock throughout 2010.

Falling silicon prices placed extreme pressure on the company’s revenues, prompting it to take capacity offline and reduce headcount by nearly 20% in 2011. SunEdison recognized nearly $1.2 billion in expenses related to restructuring and asset impairments. Results suffered again in 2012, as revenue declined and a net loss was reported. The departure of the chief financial officer also dealt a blow to investor confidence.

Restructuring sparked optimism in 2013. The company spun off its electronics wafer business, retaining the solar wafer and solar energy operations. The spinoff of SunEdison Semiconductor (SEMI) provided a $94 million cash injection, and the legacy firm changed its name to SunEdison Inc. to reflect its shifting focus. A leaner expense structure and better liquidity provided hope to investors that a turnaround was underway in SunEdison stock.

A $2.2 billion prospective acquisition of Vivint Solar (VSLR) was ill-received by the market, and the significantly worse-than-expected earnings that followed in August 2015 motivated a rapid decline in SunEdison stock, as investors began to doubt the viability of the business model. Facing another large contraction in revenues, falling liquidity ratios and rising financial leverage, the firm began taking drastic steps to protect its financial health.

SunEdison repeatedly delayed its annual filing, citing material weaknesses in internal controls that jeopardized the accuracy of reporting. Part of the company’s restructuring led to the spin off of two subsidiaries: TerraForm Power Inc. (TERP) in 2014 and TerraForm Global Inc. (GLBL) in 2015. However, these maneuvers weren’t enough to prevent SunEdison from filing for bankruptcy in April 2016. The company managed to obtain new financing to meet short-term obligations and pursue continued operations.

SunEdison’s Business Model

SunEdison’s original business model entailed building alternative energy projects for large corporations, institutions or utilities that would not have to provide any money upfront. Customers would be attracted by savings in terms of lower energy costs and tax credits. SunEdison would handle the costs of construction and make a profit by collecting revenues from energy use. It would seek to securitize these cash flows into bonds and sell them to investors. While these efforts were successful in terms of making SunEdison the largest builder of alternative energy projects, it did not translate into a rising share price. The company changed course and began selling its projects immediately after construction. In the short term, this was a more lucrative strategy with less risk, and investors began to take notice.

The next step for SunEdison involved creating publicly traded vehicles that would purchase these projects from SunEdison and then pay out dividends to its investors. These were known as yieldcos, as they were subsidiaries of SunEdison. TerraForm Power and TerraForm Global were two of SunEdison’s largest yieldcos.

Wall Street investors were enraptured by this business model, as the yieldcos would buy SunEdison’s projects at rich prices. Additionally, there was strong demand on Wall Street for yieldcos, due to low interest rates. This led to big dividends for the yieldcos and profits for the parent company. Based on this logic, SunEdison stock became a favorite among growth investors and hedge fund managers. Between June 2012 and July 2015, SunEdison stock climbed 2,200%.

SunEdison used its success to borrow even more money with the confidence that any projects could be sold to its yieldcos as a last resort. However, this created a moral hazard in which SunEdison became less discerning in terms of what projects it picked.

In late 2015, investors in the yieldcos objected to the rich prices paid and the seeming conflict of interest. For example, SunEdison’s chief financial officer (CFO), Brian Wuebbels, was also the chief executive officer (CEO) of both TerraForm Power and TerraForm Global. Many complained that SunEdison was offloading undesirable projects at unrealistic prices to its yieldcos. This led to increased scrutiny for SunEdison, and questions were raised as to how these entities were being valued on both balance sheets. Essentially, SunEdison was offloading projects at stretched valuations to yieldcos controlled by SunEdison’s management. As a result, on March 30, 2016, Wuebbels resigned from both companies, including the board of directors.

As long as investors were willing to buy shares of these yieldcos for their dividends, SunEdison would not face any consequences and investors in SunEdison, TerraForm Power and TerraForm Global would be content. However, the consequences of this financial engineering quickly became apparent when yieldcos became hamstrung in their abilities to buy projects from SunEdison as more money was paid out in dividends. As a result, assets on SunEdison’s balance sheet had to be marked down.

This created a negative spiral in which many began to question the legality of these structures and the valuation of these entities. Of course, these questions only accelerated SunEdison’s demise, as investors became even less willing to put money to work in its yieldcos. As the market lost confidence in management, the liquidation began. In the nine months leading up to the company’s bankruptcy filing, SunEdison stock lost 99% of its value.

SunEdison Files for Bankruptcy

On April 21, 2016, SunEdison filed for Chapter 11 bankruptcy protection. SunEdison stock was delisted from the NYSE and started trading on the pink sheets under the symbol SUNEQ. Yieldcos TerraForm Power and TerraForm Global were not included in the bankruptcy filing. At the time, SunEdison was also undergoing an investigation by the Securities and Exchange Commission (SEC) over what it had disclosed to investors.

Chapter 11 bankruptcy protection allows a large company in heavy debt to restructure and pay creditors over time while its assets remain under court jurisdiction.

At the time SunEdison filed for bankruptcy, its debts were estimated to be $16.1 billion and they still had several projects in development. SunEdison won final approval for its bankruptcy plan on July 25, 2017.