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Every industry needs their “guiding light” and in solar for the last few years that company has been SunEdison. The company could do no wrong and under the watchful eye of Ahmad Chatila, SunEdison has pivoted from being a leading producer of polysilicon to being one of the largest developers and owners of solar projects in the world with a pipeline of 8.1GW with 1.9GW currently under construction. It has spun off two separately traded public companies TerraForm and TerraForm Global both of which buy assets from SunEdison when projects are completed and then collect revenues from selling electricity which enables these companies to pay dividends to their shareholders. At the same time, SunEdison has made a significant amount of acquisitions over the last year including spending $2.4bn on First Wind last November and then $2bn for Invenergy and $2.2bn for Vivint Solar, both of which took place last month. And the result has been a 10 fold rise in the SunEdison share price over the last three years to a recent high of $32.13!
But over the last few weeks SunEdison seems to have lost its Midas touch and the stock price is down over 50% since the 20 July. On that faithful day SunEdison announced the acquisition of Vivint to accelerate growth in the US solar residential segment as well as launched the roadshow for the company’s second YieldCo, TerraForm Global. Many investors saw the acquisition of Vivint as a step to far. Not only was it another acquisition in a very short period of time but it was also a step in to the residential solar market which many perceive as riskier given the different credit metrics and off-takers. To add to the misery, the IPO of TerraForm Global (GLBL) was very disappointing. Management had hoped to raise $1.1bn but instead only raised $456m and did so at a much lower price ($15) than the original range of $19-21. To make things worse TerraForm Global has since collapsed in price and was recently trading below $10. And other YieldCos such as NRG Yield have also followed suit which begs the question whether we are seeing the death of the YieldCo?
The negative sentiment is partly investor fatigue given the numbers of YieldCo primary and secondary issues we have seen in recent years. There have been 16 YieldCo IPOs over the last two and a half years which have raised over $13bn in equity and alone over the last eight weeks we have seen 8point3 Energy and TerraForm Global come to market as well capital raises from TerraForm and Patern Energy. But the other issue is a growing view that higher interest rates will lead to higher costs of capital making acquisitions less economic. This in turn could lead to reduced growth and lower share prices which would increase the cost of capital thereby bringing the YieldCo into a downward death spiral.
A major offset to this negative view is that as interest rises so will all costs of capital which will mean there will be a recalibration of asset acquisition costs. In this scenario the YieldCo will still remain an optimum source of capital for renewable projects; it’s cost of capital may well become higher but it will be lower than the competition meaning that it will still be the best buyer. The only issue is that the margins of the developer will suffer. Currently project developers are building at 8-10% unleveraged IRRs in the US and selling to YieldCos for 6-7% returns. This is a very high margin and these developers will have to sell at lower prices in the future because they still need owners for their projects, and that owner will continue to be the best buyer, which will be the YieldCo with its specially designed low-risk, low cost dividend paying model. What we are seeing now is just the growing pains of a growing an innovative new asset class.