22 December 2015

TERP downgraded as hedge fund begins investigation

TerraForm Power (TERP) has been downgraded further into junk territory by Standard & Poor's, following a number of "aggressively" leveraged acquisitions.   

The yieldco – a listed company, usually spun-off from a renewable energy developer, that owns operational assets and pays substantial dividends – was downgraded two notches from B+ to B-, leaving it at the bottom end of the 'highly speculative' range.

The downgrade comes just days after it announced the first close of a deal buy a 930MW wind portfolio from Invenergy.  

The $1.9 billion deal included the assumption of $800 million of project level debt and will see TERP's debt balloon to 6.5 times its earnings in 2016, up from from 3.6 times in 2015, according to Standard & Poor's.

The ratings agency also cited a similarly aggressive debt financing strategy in a recently restructured deal to acquire rooftop solar company Vivint Solar.

"The downgrade on TERP mainly reflects its aggressive debt financing of the recently closed Invenergy acquisition and potentially a similar aggressive financing of the pending Vivint acquisition," said Nora Pickens, a credit analyst at Standard & Poor's.

Meanwhile, both deals have come under heavy criticism from billionaire David Tepper whose hedge fund Appaloosa Management owns a 9.5% stake in TerraForm Power.

Tepper on Monday penned the latest in a series of letters to the company's management, demanding access to the TERP's books as part of an investor-led investigation into whether the yieldco's management had breached its fiduciary duty in pursuing these acquisitions. 

He contends that both deals favour TERP's parent company, SunEdison, which had exercised undue influence, and that the deal did not represent good value for the yieldco's investors.

In another recent letter the hedge fund manager threatened legal action over TERP's failure to disclose information about these deals and its relationship with its parent.

"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 downgrade and Monday's letter come after SunEdison and TERP's share price rebounded on moves by the yieldco and its parent to restructure both deals in favour of the yieldco.  

Both SunEdison and TERP's share price had slumped in recent months following the announcement of the Vivint Solar deal, losing 94% and 75% of their share price, respectively.

TERP's share price was down 6.31% to $12.01 a share from $12.83, on news of the latest announcements.