The market certainly sees some good things ahead for TerraForm Power (NASDAQ: TERP), the embattled yieldco that's being partially bought out by Brookfield Asset Management (NYSE: BAM). Shares are trading at $13.60 as of this writing, well exceeding the cash buyout price of $11.46 per share. That means that when the buyout takes place, a vast majority of shareholders will take their $1.94 special dividend and one share of new TerraForm Power stock (or less if the deal is prorated).
It's unusual for a stock to trade so far above a buyout price, but in this case, it may be warranted. In fact, Brookfield could add a lot of value to TerraForm Power in the long term.
Lower borrowing costs
One of the first impacts Brookfield will have is increasing stability at TerraForm Power, who has been in turmoil since its current parent company SunEdison filed for bankruptcy over a year ago. As a result, SEC filings have been late and debt costs have skyrocketed.
Another yieldco Brookfield controls, known as Brookfield Renewable Partners (NYSE: BEP), has much lower borrowing costs than TerraForm Power. Brookfield Renewable's corporate debt has an average interest rate of 4.5% with maturity in 6.9 years. TerraForm Power's senior notes due 2023 (six years from now) have an interest rate of 6.38%, and notes due 2025 (eight years from now) have an interest rate of 6.63%.
If borrowing costs at TerraForm Power can be reduced by a percentage point or more, it would free up more cash that can be used to pay dividends or buy growth projects. And both could drive the stock even higher.
A steady pipeline of renewable projects
One thing every yieldco needs is a pipeline of new projects to buy, which will help grow the dividend over the long term. SunEdison's pipeline is effectively gone, so Brookfield is going to bring a new pipeline to TerraForm Power.
The companies have said that Brookfield will provide 1.2 GW of projects in a right of first offer pipeline with another 2.3 GW in a development pipeline. About $500 million of acquisition financing can also be used if TerraForm Power's cost of capital remains elevated. Both should get the yieldco on its feet and back to regular project acquisitions.
If borrowing costs fall and the pipeline of projects remains steady, TerraForm Power will have to decide how big a dividend it wants to pay. When it was controlled by SunEdison, the yieldco was very aggressive with its dividend growth, but Brookfield may take a more conservative approach.
Brookfield Renewable Partners doesn't actually issue shares to fund new project acquisitions, as most yieldcos do, instead choosing to grow organically. That reduces the potential growth of the dividend but makes the company and the dividend more stable over the long term.
Brookfield hasn't said exactly what its dividend strategy will be, but it will certainly be more disciplined than SunEdison was, and that's good news for long-term investors.
The future looks brighter
It'll take some time for TerraForm Power to get back to regular operations, but under the guidance of Brookfield Asset Management, the company has the right formula to be a big winner in the yieldco space. Watch for lower borrowing costs, a solid project pipeline, and a conservative dividend as signs TerraForm Power is on its way to being built to last.
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