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SunEdison Is Smoked. What About the TerraForms? (GLBL, TERP)


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The end is finally here for once red-hot solar stock SunEdison Inc ( SUNE ). The solar operator's tale of overexpansion, failed deals and high debt is finally coming to an end. As expected, SUNE is finally filing for bankruptcy protection to right-size itself and try to get back to the business of making solar and grid-scale solar farms.

terraform-power-inc-terp-stock-yieldco-185 While the bankruptcy news isn't good for long suffering SUNE shareholders, those investors in its two yieldcos -  TerraForm Power Inc ( TERP ) and TerraForm Global Inc ( GLBL ) - might want to put on their party hats.

The situations for TERP and GLBL still are complex given their relationship with SunEdison, but breaking free of the yoke might actually be one of the best things to happen to these to yieldcos.

Wall Street would agree, given its reaction over the past two days. TerraForm Power and TerraForm Global are up a respective 7% and 20% since the announcement. And for those investors just joining in, the pair might make an interesting dividend/value play.

A risky play, but an interesting one nonetheless.

TerraForm Power and TerraForm Global Break Free!

The basic idea behind yieldcos is that solar farm developers like SunEdison could chuck some of their renewable energy assets into a new firm, add a splash of tax credits/benefits and reap steady cash flows and dividends. That formula worked out well in the beginning - and actually still works well for a few yieldcos, such as 8Point3 Energy Partners LP ( CAFD ) and Nextera Energy Partners LP ( NEP ).

For TerraForm Power and TerraForm Global, however, that hasn't worked out so well, at least on the surface. That's on SUNE.

Shares of the two yieldcos have plunged right alongside SUNE amid concerns about SunEdison's debt and legal issues spilling over and causing headaches for GLBL and TERP.

The truth is, that's simply not the case.

For starters, neither of the TerraForms are liable for SunEdison's debts. Both are separate legal entities from their parent, and as such, respective wind and solar power plants are owned by TerraForm Power and TerraForm Global - not SunEdison. That's a key provision, as these solar and wind farms are not available to satisfy the claims of creditors of SunEdison . In short, a bank can't go after TERP to pay SUNE's debts.

What's important here is that these renewable energy assets - all 3,565 megawatts between the two - generate cash flows on long-term power purchase agreements with utilities. And that won't change regardless of what SunEdison does from here.

Secondly, investors may have overstated the relationship between the yieldcos and SUNE.

While the original setup was for SunEdison to drop its own assets into GLBL and TERP, the truth is that the bulk of its purchases have come from third-party sources. For example, SunEdison's purchase of First Wind Holdings, LLC came from outside its umbrella. The failed Vivint Solar Inc ( VSLR ) deal was another example.

SunEdison basically provided the cash (or in this case, debt) - not actual solar farms or anything else. So both yieldcos will continue to shop outside SunEdison's umbrella as they did before.

Finally, both yieldcos have expressed the fact that they have enough liquidity to operate as ongoing concerns. Both TERP and GLBL are still waiting to file earnings reports, thanks to issues with SunEdison's internal auditing controls, but their claims of liquidity stand true as of the most recently reported quarter.

And while TERP did acquire assets from Invenergy Wind - again, outside SUNE's umbrella - since it last filed earnings, it still should have plenty of cash left.

TERP and GLBL Still Are Gambles

The problem for TerraForm Power and TerraForm Global could come down to growth.

SunEdison, if nothing else, was very generous with the capital it provided its yieldcos (part of why it has $11 billion-plus debt). That's clearly going to dry up, so the question is: How will the pair raise enough money to buy more assets to tuck into themselves?

Given their price drops and low credit ratings, that will be more difficult than before … but not impossible.

Removing SunEdison from the picture could actually benefit their ratings. Secondly, both TERP and GLBL could be forced to do thing the old fashioned way - by paying in cash. Again, their assets are real cash-generating items. So while that might take a while - they'll need to save up to by something - both still could make this happen.

Dividend cuts might be in the cards, too. GLBL, for instance, is yielding in excess of 36%.

So where does that leave investors?

The TerraForms are two interesting, high-yield instruments that have been (somewhat unfairly) lumped in with their struggling parent.

They're not risk-free plays. Far from it. There's plenty that could go wrong - especially with TerraForm Global, which isn't as far along in its development as TerraForm Power. But with SunEdison essentially out of the picture, it might be time for the sun to shine on both.

TERP might be the better pick of the pair. As of its last filing, it was profitable and had enough coverage on its dividend - which make sense, as it "only" yields 13%, or roughly a third of GLBL's. The key will simply be growth. But for now, TerraForm Power shouldn't be filing for bankruptcy, nor should it have any liquidity risk. Power could end up rewarding investors over the longer-term.

As for Global? Well … that one is for real risk capital.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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The post SunEdison Is Smoked. What About the TerraForms? (GLBL, TERP) appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Stocks
Referenced Symbols: GE , TERP , VSLR



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