4 December 2015

SunEdison may face legal action over Vivint

Billionaire investor David Tepper has compounded a tough couple of months for SunEdison's management with a threat of legal action and raised his stake in its yieldco subsidiary TerraForm Power (TERP) to 9.5%.

The founder and CEO of hedge fund Appaloosa Management, took the unusual step a day after he penned an open letter to SunEdison's board accusing it of having obvious conflicts of interest.

The legal challenge focuses on a recent TERP board meeting that Tepper alleges was disclosed in a manner that warrants a legal challenge. The board meeting was held on 20 November and led to a management reshuffle at the listed yieldco subsidiary.

"Substantial further disclosures are incumbent on TERP so that investors can assess the full impact of the pending transactions, the relationship between TERP and its "sponsor", and the circumstances surrounding the changes in TERP's management and board," said Tepper in the letter.

The reshuffle saw TerraForm's CEO Carlos Domenech replaced by SunEdison's CFO Brian Wuebbels. It also saw the exit of TerraForm Power's CFO Alex Hernandez, who had been appointed to the role a month earlier.  

SunEdison described the reshuffle as a move towards "aligning the company's strategic focus around acquiring projects from its sponsor," a move that Tepper believes gives rise to a conflict of interest.

Also at the heart of the issue is SunEdison's much criticised acquisition of rooftop solar company Vivint Solar.

SunEdison originally announced this deal in July, and said it planned to pay for it using a mix of cash, debt and equity.

SunEdison said the cash portion of the deal would come from a simultaneous drop down of 523MW of Vivint Solar's operational assets to TERP when the deal was executed.

Yieldcos are listed companies that own operational renewable energy assets and pay out the majority of the cash generated from these assets in dividends. They can be, as is the case with TERP, a spin-off from a renewables developer.

Tepper contends the Vivint deal would require TERP to buy "inferior" solar installations from weaker credit counterparties.

One market observer, speaking anonymously to Environmental Finance, said: "We were at the time surprised at what they paid for it. They were paying an awful lot for residential solar with less credit then a commercial project and a tremendous amount for their pipeline." 

SunEdison's share price since the acquisition was announced has fallen from a high of $31.66 on 20 July to $3.78 today.

In August its share price plunged 25% after the company's second quarter results were announced, as investors began questioning the Vivint acquisition.

TERP's share price has slumped, since the Vivint Solar acquisition was annouced, from $34.90 a share in July to $6.90.

As the share prices of both SunEdison and TERP fell, management at the yieldco told investors they would not be using equity to purchase the Vivint assets.

SunEdison and TERP's shares experienced a similarly sharp decline after SunEdison's third quarter earnings call, as confusion mounted over how the deal would be executed.