SunEdison (SUNE) Rating Cut to Neutral at JPMorgan as Situation Seen as 'Risky'; Firm Can Avoid Bankruptcy, Says Analyst

(Updated - November 20, 2015 9:33 AM EST)

JPMorgan downgraded SunEdison (NYSE: SUNE) from Overweight to Neutral with a price target of $5.50 (from $19.00). Shares have been in a 'death-spiral' for months and analyst Paul Coster sees the situation as risky, but he thinks the company can avoid bankruptcy.

"We think SUNE is still able to escape the ongoing liquidity crisis, but at a high cost owing to M&A over-commitment, reduced cash flow from the YieldCos, increased use of high-cost financing options and the negative impact this has on DevCo revenue-growth and margins relative to our prior expectations," said Coster.

The analyst continued, "We believe the firm can avoid bankruptcy, and there are actions that can be taken to restore confidence, but there are also risks, primarily centered on ongoing negotiations with Vivint (NYSE: VSLR) and Renova, and the need to execute a pivot to DevCo cash sales at decent margin against the backdrop of distractions. We think the stock is somewhat undervalued, the firm’s development and operational assets are high quality, but the situation is complicated, fluid and risky, so we move to the sidelines, deeply disappointed that we did not do so ahead of the 'death-spiral'."

Coster added, "We believe cash-drain associated with ongoing M&A, margin calls, earn-outs and litigation will require SUNE to moderate growth relative to prior expectations. We have trimmed the annualized shipment runrate to 3.3GW, the lower end of the prior guidance range. We have reduced gross margins slightly to 16.5%, to reflect higher funding costs in COGS. We have significantly reduced DPS growth-rates for both TERP (Nasdaq: TERP) and GLBL (Nasdaq: GLBL), which reduces dividend payments to SUNE, and we have eliminated IDRs. Finally, we no longer assume as-converted share-count because all the convertible debt is trading well below strike price."

Discussing SunEdison's liquidity outlook, the JPMorgan analyst said, "The reduction in revenue and EBITDA weighs on cash flow relative to prior expectations. We have also adjusted our cash flow forecast to better reflect the impact of potential cash payments relating to the Vivint acquisition, the Renova acquisition, settlement of the margin loan and settlement of potential LAP claims. A restructuring of the Vivint acquisition could be a favorable development, and we note that the firm may be in a position to sell late-stage pipeline or POC projects to raise funds to mitigate risks. By our calculation, SUNE remains liquid through 2016-2019, positioned to roll over debt in 2020."

For an analyst ratings summary and ratings history on SunEdison click here. For more ratings news on SunEdison click here.

Shares of SunEdison closed at $2.86 yesterday.

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