TerraForm Global (NASDAQ: GLBL) reported 2015 financial results this week and there wasn't a lot for investors to like. Revenue was $124 million, but its operating loss was $223.6 million afterthe $231 million acquisition of Indian assets from SunEdison was written off, and its net loss was $212.7 million.
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Yieldco accounting is a little strange, so don't be overly concerned about the fact that TerraForm Global lost money. What should be a concern is the financial position of the company, which is still a little unclear as it tries to break free of SunEdison.
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Debt is still a big problem
The investor presentation earlier this month showed that TerraForm Global had $1.11 billion in debt and will likely generate $153 million to $180 million of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) this year. A common covenant in debt financing is to keep debt/EBITDA below a pre-set ratio, often around four times or five times in the case of Yieldcos. TerraForm Global's debt/EBITDA ratio was 6.2 in the presentation.
With that said, the company also had $678 million in unrestricted cash, which makes the net debt situation more palatable. If you pull the cash out, net debt/EBITDA is between 2.4 and 2.8. That's manageable if the company can get debt at reasonable costs -- but that's in question. Senior Notes due 2022 came with an incredibly high interest rate of 9.75%, and permanent financing for projects had an interest rate of 12.2% at the end of 2015. With interest rates that high, it will be difficult to make money or generate enough cash for a dividend without cutting debt dramatically.
Once TerraForm Global is free of SunEdison, it would be wise to pay down debt and increase the net cash flow from operating assets. Having cash on the balance sheet isn't doing anyone any good when debt costs as much as it does for TerraForm Global.
Contract lengths are short and currency risk is high
When yieldcos buy projects, they usually buy assets that are fairly new and have long-term contracts to sell energy to a utility. The newer an asset and the longer the contract, the more valuable the asset is, and vice versa.Nearly a quarter of TerraForm Power's assets are over five years old and 61% of assets are over four years old, so the asset base is already aging. Worse yet, nearly 60% of assets have contract terms shorter than 15 years.
The relatively old assets and short contract duration of assets is a concern, especially when you consider that TerraForm Global can't make money as it is today. Long term, this is a real challenge.
Is this a going concern?
You can make a ton of assumptions about the value of TerraForm Global's assets and what cash flow might be generated in the future, but the big unknown that doesn't have an answer is what happens to the company's projects around the world with SunEdison in bankruptcy.
TerraForm Power said in its 10-K filing with the SEC that it has broken multiple covenants for debt, ranging from senior notes to project level debt. There are also power purchase agreements and financing arrangements that include "change in control" provisions that could be triggered if SunEdison no longer controls TerraForm Global. This could lead to default, termination of contracts, or a renegotiation of contracts at less favorable rates.
We simply don't know how any of these arrangements will play out. Until we do, the stock is a huge risk. The company's auditors even raised the dreaded "going concern" language in the 2015 10-K, saying:
No company wants to have questions about its ability to remain in business as a going concern. Until we know more, this is a stock I wouldn't go anywhere near.
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