Analyst: TerraForm Entities Have Significant Legal Risk After Sunedison Bankruptcy

The bankruptcy filing of Sunedison Inc SUNE creates significant legal risks for TerraForm entities, according to a note from CreditSights.

SunEdison filed for bankruptcy, but left out its yieldcos TerraForm Power Inc TERP and TerraForm Global Inc GLBL in the filings. On the news, shares of TerraForm Power rose about 6 percent and TerraForm Global surged more than 11 percent.

In a press release, SunEdison said it has secured commitments for new capital totaling up to $300 million in debtor-in-possession (DIP) financing from a consortium of first and second lien lenders.

"We continue to believe there is significant legal risk and no clear view on financials given that TERP and GLBL have still not filed a 2015 10K," CreditSights wrote in a note.

CreditSights added that, according the most recent revolver amendment, TERP could potentially file financials by April 30.

The financial research firm said the bankruptcy filing affirmed its earlier view that with the Class B shares of TERP and GLBL amounting to over $700 million, creditors would seek to maximize the value of these shares rather than go after the yieldcos' assets.

According to a note from CreditSight, SUNE creditors can seek to maximize the value of those Class B shares in the following two ways:

1)" Restart the SUNE DevCo/dropdown machine by growing TERP and GLBL and possibly hitting the incentive distribution rights (IDR) splits, which would potentially increase cash sent back to SUNE."; or

2) "Sell the Class B shares to a third party, which will likely create stronger corporate governance and investor confidence in TERP and GLBL and possibly more manageable balance sheets."

"We feel that option 2 may entice the market to award TERP and GLBL with cheaper costs of capital, which in our minds should be the board's #1 priority as the yieldcos begin their respective healing processes," CreditSight said.

Commenting on the credit risk, the research firm noted that perceived credit risk at TERP is decreasing immensely. But, it continued its cautious stance on TERP CAFD (Cash Available For Distribution) as it is certainly possible that cash could get trapped at the project level given the parent company's bankruptcy filing.

The note said TERP confirmed that CAFD guidance, excluding Vivint and Invenergy, was $208 million and the Invenergy dropdown press release put incremental unlevered CAFD at $139 million, implying TERP CAFD of about $347 million in 2016.