There are many reasons a company of SunEdison’s stature can pack up the bags and ship out, and believe it or not, growth has as much to do with it as anything else. SunEdison stock was as high as $33 less than a year ago and is now worth $.34 per share. Roughly a 99% drop in company value is tough to swallow for any investor, and likely they’ll just file for Chapter 11 and get to “reorganize” their debt and eliminate us investors (yes, I am a company stock owner). For a large company with a great reputation (other than the last few months financial fiasco) growth, debt, and overhead are the three main reasons.
Growth. Growth of a business is normally a good thing, but growing too quick could often derail a business. When the company hit its stride in the non residential business signing PPA’s they had a nice growth curve. Solar and wind projects are capital intensive to install the equipment and the payback comes over a long period of time. SunEdison made a habit to bring in an equity investor in a “sale-leaseback” transaction in each fund, which left SunEdison to invest a remaining portion before debt. In the low margin solar business, there isn’t that much money to invest in your own projects after overhead, which means more debt to make the wheel turn. So you have equity, debt, and debt to be repaid over the long run. The readily available capital is not long term capital, which means you need a mix of capital. Balancing the debt and debt payments is an art and the art is heavily weighted on the capital markets and stock value to access that capital.
Debt. There is not secret that investors like leverage. “Finance it all” they say. Debt is a great mechanism to increase investor returns in a fixed income asset. SunEdison loved this model and in order to sell and install more projects, they needed more debt. Investing in more projects required more debt, and building the infrastructure to manage these transactions in volume required more debt to cover our next reason they are going under.
Overhead. Solar, wind and other renewable energy technologies requires expertise to ensure that everything goes smoothly on the design, engineering, installation, financing, operations, management, and maintenance of each project. That is a lot of categories. Not to mention the authorities that are required a thumbs up from like the City/County/State/Utility. That is a lot of people to ask if you can do a project, and every time any one of those entities redlined the plans, it is difficult to manage and sometimes it forces the need to go back to the drawing board and start the process all over. It takes a lot of sets of eyes and ears to ensure a solar project is executed to perfection. No one has been able to turnkey the financing process of commercial solar or wind yet, however SunEdison really gave it a shot. There is no FICO score to rely on like residential solar, each project and client needed to be looked at thoroughly which added to the cost of overhead. To date there is still no magic formula. Overhead and infrastructure management can also be a killer if a business is to big to match their growth. The goal of business is to put a quarter in and get a dollar out. Seems as though SunEdison invested a quarter and got a dollar out over 20 years, but the machine cost them $.85 up front.
So who is the next 800 lb gorilla to take over the commercial solar and wind sector?
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