SunEdison Plunges Further on False Rumors: More to Come?

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The market witnessed high-octane drama at this year's worst-performing solar company SunEdison Inc.SUNE throughout yesterday. Shares of the company started trading at just 5 cents higher than Tuesday's closing price of $3.02, and went up 7.6% at the close of normal trading hours. The improvement came after Deutsche Bank analyst Vishal Shah's positive comments on the company and a rumor that The Blackstone Group L.P. BX could backstop its debt.

Shah reaffirmed the 'Buy' rating on SunEdison and wrote a note to its clients saying that "We continue to believe liquidity concerns are overdone and the execution on pending transactions along with refinancing of margin loan could act as positive catalyst for shares".

Shah's statement shows that not many minds on Wall Street are worried about the recent fund sales by hedge fund investors (Read: Hedge Fund Managers Cash Out of SunEdison: Should You Too? ) and still believe in the company's growth prospects. Later in the day, a rumor about Blackstone's credit arm GSO's plan to backstop SunEdison's debt further boosted investors' confidence.

The back-to-back positive news along with the fact that SunEdison is trading roughly 91% lower than its 52-week high of $33.45 attained on Jul 20, led investors to cash in on this opportunity, sending the stock as high as 19% during yesterday's trade. Notably, this marks the biggest intraday gain for the stock so far this year.

However, the rally did not last. During after-hours trading, it was revealed that the rumors about Blackstone were unfounded which dragged shares by almost 10%. Reuters also confirmed that a person familiar with the matter had said that Blackstone's credit arm is not looking to invest in SunEdison.

This event once again raised investors' concerns. They are becoming increasingly skeptical about this Zacks Rank #3 (Hold) stock's ability to weather the current pressures as it struggles to finance the projects. This is because of a tremendous rise in debt due to the string of acquisitions, such as First Wind, Solar Grid Storage and Vivint Solar, made over the past one year.

The acquisitions have taken a toll on its balance sheet with total outstanding debt (including current portion) nearly doubling to $11.7 billion at the end of third-quarter 2015 from $6.3 billion a year ago. Additionally, in the first nine months of 2015, $1.14 billion of cash was spent on operational activities. All these factors dealt a severe blow to SunEdison's finances.

The negative operating cash flow indicates that SunEdison has not been able to generate enough cash to cover operational costs and, so, had to raise more debt.

Furthermore, the disappointing quarterly results by SunEdison's YieldCos - TerraForm Power Inc. TERP and TerraForm Global Inc. GLBL - are a major concern for investors. TerraForm Power reported a loss of 3 cents per share in third-quarter 2015 comparing unfavorably with the Zacks Consensus Estimate of earnings of 28 cents. On the other hand, despite incurring narrower-than-expected loss, TerraForm Global's revenues of $29 million missed the Zacks Consensus Estimate of $34 million.

TerraForm Power and TerraForm Global have lost over 29% and 45%, respectively, since the third-quarter 2015 results were released. Moreover, on Wednesday, shares of TerraForm Power and TerraForm Global were trading at a discount of more than 76% and 62% to their respective 52-week highs of $42.66 and $14.10.

As the parent company and the YieldCos are trading at a significant discount, it has become difficult for these companies to sell their shares in the open market at attractive market valuations and raise more funds for project financing.

The prospect of a near-term interest rate hike by the Fed is a further negative for the YieldCos. Higher interest rates make high-yielding stocks like YieldCos less attractive and raise the cost of financing projects.

YieldCos need to issue new shares (generally at higher prices than their IPOs) from time to time to raise capital for new investments as most of their cash flow is used up for dividend payments. However, SunEdison's YieldCos are facing difficulties on this front due to plummeting share prices.

Therefore, as the going gets rough for the company, we would advise investors to stay away from this stock for now.

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BLACKSTONE GRP (BX): Free Stock Analysis Report

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TERRAFORM GLBL (GLBL): Free Stock Analysis Report

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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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