SunEdison's (SUNE) bankruptcy filing could be viewed as a unique situation, but its current predicament also could provide investors with warning about some potential shortfalls of yieldcos.
Thursday's Chapter 11 Bankruptcy filing adds to a long list of troublesome situations for the Maryland Heights, Mo.-based yieldco operator, including lawsuits filed by both a failed acquisition target and its own yieldco, TerraForm Global (GLBL) , as well as pending investigations by the Department of Justice and the Securities and Exchange Commission.
GLBL closed 15% higher Thursday at $2.99 per share, while TERP ended Thursday at $10.46 per share, 6% above its April 20 close. Shares of TERP and GLBL were up an additional 1% and 3% to $10.60 and $3.10, respectively, in morning trading.
Yieldcos are a financial vehicle for the renewable energy space designed to mimic the economics of MLPs and REITs in their tax benefits and their ability to attract additional investors because of their guaranteed distributions to unitholders. They are spun off from a parent company and grow by acquiring assets from either the parent or in some instances unaffiliated companies.
TERP and GLBL assured investors that the equity interests in their respective wind and solar power plants, which are legally owned by their subsidiaries, are not available to satisfy the claims of creditors of SunEdison.
Company followers are intrigued to see how its yieldcos mitigate the situation, viewing SunEdison's woes as a litmus test for the rest of the space. Meanwhile, investors should have caution when looking to invest in at least one of the debtors' yieldcos, TerraForm Power, or TERP.
KeyBanc's Matt Tucker wrote in an April 21 research note that "TERP may incur additional liabilities as its shareholders' interests are potentially subordinated to those of SUNE's stakeholders throughout what could be a lengthy restructuring."
The theory goes that these financing vehicles are set up with enough separate elements as not to be too greatly affected by the financial situation of their parent.
"The yieldcos that we watch most closely, have a lot of elements that are independent of how the parent operates," he said. "In a lot of cases, for the yieldcos that we watch, for the most part, nothing is going to happen to them if the parent runs into financial difficulty."
Unlike the oil and gas industry's master limited partnership vehicles, which often have their own capital they can invest, yieldcos are not set up to grow on their own, Miller said.
If a yieldco doesn't find another way to acquire growth projects, which it usually picks up from its parent at attractive multiples with financing on the cheap, the company's stock could take a hit, according to Miller.
No growth means the yieldco is doling out most, if not all, of its cash, to acquire projects, which could be costly for shareholders.
While KeyBanc's Tucker has written favorably of the yeildco in the past, Morningstar's Miller said that yeildcos as a financing vehicle become a lot less attractive when stocks drop and when interest rates rise.
The majority of the largest yieldcos, including NextEra Energy Partners(NEP) - Get Report and Abengoa Yield (ABY) , are trading at levels 35% to 40% below pre-downturn highs, while SunEdison's TERP and GLBL, and NRG Yield (NYLD) have seen 70% declines.