A cautionary tale: Mercom Capital CEO Raj Prabhu on the fall of SunEdison and industry impacts


pv magazine: What were the main events and drivers that led to SunEdison’s bankruptcy?

Raj Prabhu: The company was doing really well up until July of last year when their market capitalization was about $10 billion. Originally SunEdison broke off from MEMC and took off from there. They were one of the first to launch a yieldco model in solar forming TerraForm and then later adding TerraForm Global, which I think was overkill.

The problems began after they formed yieldcos. With the yieldco structure, you have to keep dropping down assets into the yieldco for it to keep growing.

In that process, they began to get over-aggressive and started on an acquisition binge, accumulating a lot of debt. They also started getting careless in their acquisitions and started acquiring wind assets – which is not their core business – lifting eyebrows in the market. But as long as the stock price continued to increase, everything seemed fine.

The turning point came when they made the Vivint acquisition, which was a rooftop solar play, and not a strategic fit in any sense. This acquisition was a little too much for their investor base, which were already getting skeptical. Once the investors started pulling back, the stock started dropping and everything came crashing down.

Their entire acquisition strategy was built on the premise that the stock value would continue to increase. As long as their stock prices continued to go up, they had the financial wherewithal to make acquisitions by using their stock as currency. When the stock price started going in the other direction, things fell apart. The Vivint acquisition was pretty much the beginning of the end. Their market capitalization dropped from $10 billion to about $100 million in less than a year. ??That’s a pretty dramatic fall and a cautionary tale for the rest in the solar industry.

pv magazine: SunEdison CEO Ahmad Chatila referenced the sale of assets this morning. How do you expect this to play out? Any other insights into how the sale of solar projects will work? Any ideas about how much and which projects you expect to be sold?

Prabhu: They announced a debtor-in-possession financing a few days ago. The senior debt will be prioritized over others. With Chapter 11 they can still keep operating while they restructure debt.

?I am not sure what assets they will sell to cover debt. I am sure they will be looking at all assets around the world that are not already secured. They will likely look at portfolio by portfolio, country by country, to see what they can sell at what price.

pv magazine: What does SunEdison’s bankruptcy mean for the larger solar industry?

Prabhu: This is not going to affect the whole solar industry in the long term. I say that because since 2007 we’ve seen a lot of ups and downs in this sector. Initially we saw a lot of technology firms go out of business due to the oversupply situation. We saw the polysilicon price crash, followed by the recession when fundraising was very difficult – but the sector is still standing.

Through all of this, the industry has not only been here, but has continued to grow every year. Global solar installations were around just 3 GW in 2007 and Mercom is forecasting installations to reach ~65 GW in 2016. That’s impressive growth for sector that has absorbed a lot of blows.

Solar public companies may be impacted with investor perception taking a hit due to this bankruptcy. That being said, sophisticated investors should understand that this is a one-off case and there are a lot of well-run solar companies out there.

pv magazine: What impact to you expect this to have on the yieldco space?

Prabhu: The problem is with SunEdison, the sponsor, and not the yieldco. However, when you have your own yieldco suing you, that creates a perception issue. Without a strong sponsor, it is difficult to see how yieldcos can grow as they depend on the sponsor for their project pipeline.

SunEdison’s management of their yieldcos has thrown a negative light on all yeildcos. All of the inherent risks of a yieldco-sponsor relationship were realized in the SunEdison case.

Even after things went sour with the Vivint acquisition, their “management restructuring” was more of a “management reshuffling”. Senior management stayed and the changes made did not instill confidence in the investor community.

There are very well run yieldcos today in solar. There is nothing wrong with the yieldco model itself – it comes down to how it is run. This model has been successful in other sectors under different names.

This interview was conducted by pv magazine Americas Editor Christian Roselund.