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Analysis: SunEdison yieldcos in risky position

UNITED STATES: SunEdison's recent bankruptcy is unlikely to spread to its two yieldcos -- but it has left the subsidiaries in a precarious position.

SunEdison's bankruptcy filing follows two-year spending spree, including purchase of First Wind in 2014
SunEdison's bankruptcy filing follows two-year spending spree, including purchase of First Wind in 2014

TerraForm Power and TerraForm Global own almost 2.1GW of wind projects globally.

As of mid-May, the yieldcos' stock value had dropped dramatically since last summer, when SunEdison's financial turmoil started to escalate.

Yieldcos have also slumped in general. Such companies typically hold renewable-energy assets, including — as in SunEdison's case — wind projects bought from the parent company.

TerraForm Power owns more than 1.5GW of wind projects mostly in the US, equivalent to just over half of its 3GW in assets. TerraForm Global has 545MW of wind projects — almost 65% of its assets — in China, India, South Africa and Brazil. Their day-to-day operations are managed by SunEdison.

SunEdison, the self-described world's largest renewables developer, voluntarily filed for Chapter 11 bankruptcy protection in late April after a two-year buying spree, including US developer First Wind for $2.4 billion and 930MW of Invenergy wind projects for $2 billion.

The US-based yieldcos did not file bankruptcy. Indeed, when SunEdison failed, the yieldcos said they had sufficient liquidity to continue operating, had no plans to file bankruptcy and were arranging with SunEdison to have their assets run uninterrupted.

The yieldcos declined comment in more detail.

Project debt

Even so, about ten of TerraForm Power's projects face debt default and five TerraForm Global projects have already defaulted because of project-level debt with "cash trap" clauses linked to SunEdison's financial condition, Moody analyst Swami Venkataraman wrote in early May.

There is a "small but still possible potential that [the two yieldcos] may be substantively consolidated into the SunEdison bankruptcy," he said. The parent's bankruptcy could lead to lower dividend growth rates at the yieldcos, he added.

Jenny Chase, an analyst at Bloomberg New Energy Finance (BNEF), however, said banks generally have an incentive to be flexible, rather than find themselves responsible for operating assets outside their expertise. "The commissioned projects owned by the TerraForms should carry on generating electricity regardless of what happens to SunEdison," she argued.

SunEdison has offered the yieldcos the "right of first offer" on 3.7GW of renewables projects currently in development, according to BNEF. The transactions, some of which are wind, are presumably outstanding. Seven of the projects are later-stage developments, said Dan Shurey, associate analyst at BNEF.

The US Justice Department is investigating SunEdison's accounting practices, although not the yieldcos'.

Wind turbine manufacturer Gamesa declined to comment on the status of its proposed joint venture with SunEdison to develop up to 1GW of wind projects with a focus on Mexico and India.

SunEdison was also buying India's Continuum Wind Energy for $600 million, and Costa Rica's Globeleq Mesoamerica Energy (GME) for $330 million; the latter deal involved TerraForm Global buying GME then selling part of it to SunEdison.

GME is weighing its legal options against SunEdison and TerraForm Global, the Wall Street Journal reported, citing an unidentified source.

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