SunEdison Dragged by Heavy Debt Burden: Time To Dump?

With SunEdison Inc.SUNE plunging to a new 52-week low every other day, it seems that investors are becoming suspicious about the prospects of the company's acquisitions over the past year.

The company dropped to another 52-week low of $6.56 yesterday which followed Monday's low of $6.76. Notably, the stock has lost over 80% from the 52-week high of $33.45 hit on Jul 20 this year.

Why are Investors Worried?

In an effort to strengthen its position as a renewable energy developer, SunEdison has been on an acquisition spree since last year. The company acquired First Wind, Solar Grid Storage and Vivint Solar, among others, to diversify its portfolio. Apart from this, SunEdison made alliances across several countries and won various projects.

These moves, once believed to be strategic, are now being considered ineffective as SunEdison does not have the financial strength to fund the projects. The acquisitions have taken a toll on the company's balance sheet with total outstanding debt nearly doubling to $10.7 billion at the end of second-quarter 2015 from $5.4 billion a year ago.

This resulted in a massive increase in interest expenses. In the first half of 2015, the company spent $302 million on interest expenses compared with $160 million in the comparable year-ago period. Apart from this, the company has been incurring losses from the semiconductor business and increased operating expenses.

All the aforementioned factors have dented SunEdison's finances. Due to increased costs, the company posted adjusted loss of $216 million or 74 cents per share in the second quarter. Prior to that, it incurred non-GAAP net loss of $64.2 million or 25 cents in the first quarter.

It is to be noted that, during the second quarter, the company used $621 million of cash for operational activities. Additionally, in first-half 2015, $929 million of cash was spent on operational activities.

The negative operating cash flow indicates that SunEdison has not been able to generate enough cash to cover operational costs and, so, had to depend on additional debts.

All these have made investors doubt whether the company can return value to shareholders through enhanced share repurchase or dividend.

What is SunEdison Doing to Cope?

SunEdison is aware of the situation and has taken various steps over the past months to enhance liquidity position and fund growth opportunities.

Most recently, during its second-quarter 2015 earnings conference call, SunEdison announced that it has secured $2 billion warehouse financing. Earlier in September, SunEdison entered into joint venture (JV) with institutional investors advised by JPMorgan Chase & Co. to fund its renewable energy projects. Per the agreement, "J.P. Morgan's clients are expected to provide equity to purchase renewable energy projects developed or purchased by SunEdison."

Furthermore, SunEdison has entered into a JV with Dominion Resources Inc. D , the largest U.S. producers and transporters of energy, for two solar projects in Utah. Dominion invested $830 million to acquire 50% cash equity and 99% tax equity in the projects.

Additionally, to improve its liquidity position the company has formed two YieldCos - TerraForm Power Inc. TERP and TerraForm Global Inc. GLBL - and raised nearly $2 billion over the last year by publicly listing them.

A YieldCo is a publicly-traded company formed to own operating assets that produce cash flow, which is then distributed among investors through dividends. This model enables the segregation of assets related to stable operating cash flows, and is therefore more attractive for investors. It is a safer and cheaper way to finance growth and meet the rising demand for solar power.

Moreover, in May this year, SunEdison sold its remaining stake in SunEdison Semiconductor Limited through which it raised nearly $193 million.


We believe that SunEdison should now focus on generating long-term cash flows rather than expansion. Moreover, the world's largest renewable energy developer should look for ownership and financing structures, such as the ones with Dominion and JP Morgan's clients, to finance its energy projects while reducing risks for investors.

SunEdison currently carries a Zacks Rank #3 (Hold).

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

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

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