SunEdison's Problems May Impact Solar Yieldcos

SunEdison Inc's decision to halt sales of solar power plants to its dividend-paying "yieldco" units has drawn attention to the company's missteps at a time when the oil price slump has claimed renewable energy stocks as collateral damage.

So-called yieldcos are publicly traded entities that house solar and wind projects sold to them by their parent companies.

These units have long-term agreements to sell power, giving them stable cash flows, but they are dependent on the transfer of assets from their parents to increase dividends.

Yieldcos are supposed to be safe bets for people looking to invest in the volatile solar market, which is why SunEdison's decision has prompted a selloff in its stock and raised fresh questions about the viability of the yieldco model.

Some analysts and investors think SunEdison lost the plot as it tried to grow too quickly through acquisitions it couldn't afford, leaving it with little choice but to sell assets to third parties for higher prices rather than to its own units.

So, they say, it's unlikely rivals will follow SunEdison's lead and halt sales to their asset-holding businesses.

SunEdison, run out of Belmont, California, has lost two-thirds of its value since it said on Oct. 7 that it would halt so-called "asset drop downs". The company's stock hit a three-year low of $2.55 on Friday.

"It's more a reflection of SunEdison's strategy than the yieldco structure," said Hood River Capital portfolio manager Brian Smoluch. "I wouldn't throw out the whole asset class."

SunEdison's total debt of $11.67 billion is more than 10 times its market capitalization of about $900 million, according to Thomson Reuters data.

Renewable energy companies such as SunPower Corp and Transalta Corp have reassured investors that their plans to sell assets to their yieldcos remain intact.

In fact, a drop in prices of yieldco stocks have opened up buying opportunities, investors say.

Yieldcos of companies such as NRG Energy Inc and NextEra Energy Inc are good bets because the parents hold many assets that can be dropped down, they said.

Prices for all yieldcos have fallen sharply this year, caught up in a selloff caused by weak oil prices.

Up to Thursday's close, SunEdison's yieldcos - TerraForm Global Inc and TerraForm Power Inc - had lost about two-thirds of their value.

NRG Yield Inc shares have dropped about 39 percent, while Nextera Energy Partners LP's have fallen about 23 percent.

"All yieldcos are not created equal," said Rob Thummel, portfolio manager at Tortoise Capital Advisors LLC, adding that the yieldco structure remained the best way to play rising demand for solar and wind energy.

SHOULD HAVE BEEN BORING

Yieldcos have to be seen as stable income-producing investments like REITs, many involved in the industry say.

"Yieldcos should have been built as boring, fixed-income instruments," said Ted Brandt, chief executive of investment banking firm Marathon Capital LLC.

"But Wall Street couldn't do that, they ended up ... packaging them as growth instruments," said Brandt, whose firm advises energy and infrastructure companies.

Still, for some SuneEdison's situation has strengthened the case against the yieldco model.

Critics say many yieldcos overpay for assets, and don't like the fact that they need to continually raise money to buy projects in order to boost dividends.

"We don't really like the business models of U.S. yieldcos ... their acquisition appetite for projects is often bigger than the market opportunity," said David Richardson, managing director at investment firm Impax Asset Management.

JinkoSolar Holding Co Ltd, which has been looking to list a yieldco, said on Thursday that the U.S. market was not "favorable" to solar yieldcos now.

The MAC Global Solar Energy Index has fallen nearly 30 percent this year.

Some also draw a comparison between yieldcos and Master Limited Partnerships, set up to hold their parents' oil and gas pipelines.

MLPs were all the rage a few years ago, but have since fallen out of favor for the same reason that has hurt yieldcos - a slump in oil prices that hit dividend growth.

(Reporting by Swetha Gopinath in Bengaluru; Additional reporting by Sneha Banerjee; Editing by Sayantini Ghosh and Ted Kerr)