Credit Suisse More Constructive on SunEdison (SUNE) Despite Dilution
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Credit Suisse analyst P. Jobin cut his price target on SunEdison (NYSE: SUNE) to $19.00 (from $25.00) but maintained an Outperform rating. Jobin notes the cash infusion increases flexibility although the high financing costs and dilution frustrates investors.
"In typical SunEdison fashion, a set of rather complex and optically onerous transactions were announced yesterday," Jobin commented. "The company raised a second-lien term facility and exchanged a portion of the existing convertible debt for equity. The headline figures were not great, including an effective > 20% cost of debt and 21% dilution from share issuance, and natural hedging of the newly placed $225m 2018 convert, and led to the pronounced stock weakness (-36%)."
The firm sees more reasons to be constructive on the stock. " First, net recourse debt has been reduced by $300m, the cash buffer has been increased allowing the company additional flexibility as it navigates the 2016 transition period pivoting towards warehouse and third-party sales instead of yieldco capital raising and further removing the risk of an acute liquidity crisis. The company now forecasts a minimum cash balance at SUNE DevCo of $931m in 2Q16 compared to the prior forecast of $575m following the exchange transactions and restructured First Wind earnout payment schedule. Secondly, the debt was already trading at a significant discount to par - the convertible debt exchange (reducing principal by $738.5m but issuing ~68.5m shares) implies an equity conversion price of $10.78, a 96% premium to Wednesday's close. The negatives most investors appear to be focusing on include more dilution (7% from the warrants, 21% in total from the debt exchanged for equity... which could increase as shares slide, we are unware of a collar on the exchangeable notes and mechanics for the 40m+ share issuance), a nearer-term debt maturity schedule (with the second lien maturing in 2018 and reduction in longer-term convertible debt maturing 2018 through 2025), and the newly-disclosed fact that the company only had $56m of unrestricted cash at the end of Q4 (hence the urgency for executing this transaction)."
The firm raised 2016-17 EPS estimates to ($0.86)/($1.57) from ($0.88)/($1.80).
Shares of SunEdison closed at $3.34 yesterday.
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