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New York - As SunEdison navigates through bankruptcy, an 11-day period in November continues to haunt the world’s largest renewable-energy company.
Over that period, the company misrepresented its financial health, withheld details about an imminent margin-loan deadline and ousted several independent directors at the two publicly traded yieldcos it founded and controls, as it sought funds to make the looming payment, according to lawsuits filed against SunEdison prior to its bankruptcy.
SunEdison won court approval on Tuesday for a $1.3bn operating loan. That package will also fund a creditor probe into its financial activities, and the findings will shape the outcome of the bankruptcy. Meanwhile, creditors say the company shouldn’t be in charge of managing its own cash, a question scheduled to be addressed at a June 21 hearing.
The reason is SunEdison’s “large, opaque capital structure, with complex intercompany relationships and cash flows, poor accounting, poor controls and allegedly fraudulent conduct at the highest levels,” creditors said in a May filing. A key event came at the culmination of the 11-day period, an incident that one of the suits called the “Friday Night Massacre.”
Conflicts committees
That was when SunEdison reconstituted the boards of the two yieldcos it had formed to buy its power plants, TerraForm Global and TerraForm Power, and the new boards then remade their conflicts committees - independent directors tasked with evaluating transactions with the parent company.
SunEdison’s then-chief financial officer Brian Wuebbels, also named in the lawsuits, became chief executive officer of both TerraForm yieldcos.
SunEdison’s actions “led many commentators to draw parallels with the Enron” bankruptcy, creditors said in the complaint. Enron lost the right to handle its own cash.
“I’ve never seen a situation where a conflicts committee of the board was fired,” said Nell Minow, vice chairperson at ValueEdge Advisors LLC, which advises investors on governance issues.
‘False statements’
SunEdison’s lead bankruptcy lawyer, Jay Goffman, said in court that the creditors’ allegations are “gamesmanship and false statements” to help boost recoveries. He didn’t respond to requests for comment.
SunEdison declined to comment on allegations in the suits - one brought by TerraForm Global and the other by TerraForm Power shareholders led by Appaloosa Management, the hedge fund run by billionaire David Tepper. It has yet to file a response to the TerraForm Global suit.
A February response in the Appaloosa suit includes a redacted section addressing the changes to TerraForm Power’s board.
During the company’s November 10 third-quarter conference call, then-CFO Wuebbels said it had “sufficient liquidity” - about $1.4bn - at the end of the third quarter.
Looming deadline
Yet SunEdison’s management was facing a potential crisis: a $100m payment on a margin loan, due on November 20, according to the TerraForm Global suit filed in April. Missing the deadline could trigger cross defaults on parts of almost $8bn in SunEdison debt, according to the suit.
SunEdison had already told TerraForm Global in October it “had a short-term need for additional cash,” according to the suit. SunEdison was developing a portfolio of solar projects in India that were earmarked for sale to TerraForm Global and SunEdison asked TerraForm Global to prepay for them. The yieldco refused because the projects weren’t complete.
TerraForm Global management learned about the margin payment two days before it was due, on November 18, according to the suit. The yieldcos evaluated ways to get SunEdison the money - including share buybacks, selling assets or an unsecured loan coupled with governance changes that would reduce SunEdison’s control over their boards, according to the suit.
The conflicts committees rejected these ideas - in part because SunEdison wouldn’t agree to governance changes, TerraForm Global said in its complaint.
Pulling closer
To get around this opposition, SunEdison reshaped the committees, according to the suit. The developer called for meetings of both yieldcos’ boards on November. 20. Senior management was replaced and SunEdison reconstituted both boards. The new boards then remade the conflicts committees, TerraForm Global said in its suit.
“They could see trouble,” said Swami Venkataraman, an analyst at Moody’s Investors Service. SunEdison was “trying to come up with other things, pulling the yieldcos closer.”
The events showed SunEdison’s ability to exercise control, according to Appaloosa’s January lawsuit. Appaloosa owns 3.1% of TerraForm Global, and is TerraForm Power’s second-biggest shareholder with a 9.5% stake, according to data compiled by Bloomberg. Tepper declined to comment on the suit.
An amended Appaloosa filing in March called the board shakeups the “Friday Night Massacre.”
“That’s when it became clear that SunEdison was willing to do whatever it took to save itself,” said Michael Morosi, an analyst at Avondale Partners LLC. “The turmoil with management, the turnover of the board, that’s when it became clear that the yieldcos were being viewed as a source of liquidity.”
14:15 meeting
TerraForm Global’s new conflicts committee met by phone at 14:15, November 20, less than an hour before the payment was due. SunEdison requested prepayment for the India projects.
The “false, misleading and one-sided” presentation didn’t disclose the margin loan, or that the directors who had been replaced had already evaluated and rejected ways to transfer funds to SunEdison, according to TerraForm Global’s lawsuit.
TerraForm Global’s suit alleges that SunEdison said the board changes were needed to get a decision on another pending deal, the acquisition of Vivint Solar., which was later cancelled.
India projects
The new conflicts committee agreed to immediately advance $150m for the India projects, according to the TerraForm Global suit. SunEdison instead used it to pay the margin loan minutes before its 15:00 deadline, TerraForm Global alleges. The yieldco is seeking $231m, to cover that payment and another $81m provided later that it says was also earmarked for the India projects.
Spokesmen for TerraForm Power and TerraForm Global declined to comment on the allegations and said members of the conflicts committees were unavailable for comment.
In its response to the Appaloosa suit, SunEdison defended the independence of the directors appointed to TerraForm Power’s board on Nov. 20. Both cases against SunEdison have been stayed by the bankruptcy. Wuebbels, who stepped down as CEO of both TerraForms in March and has been terminated from SunEdison, wasn’t made available to comment.
SunEdison hasn’t been straight about its finances, said Steven Azarbad, chief investment officer of Maglan Capital LP, a distressed hedge fund that exited its position in SunEdison this year, before the company filed for bankruptcy.
One sign, according to Azarbad, was Wuebbels’s November 10 assertion that SunEdison had $1.4bn in liquidity, when in fact much of that was already committed to specific uses. That detail, Azarbad says, was in an investor presentation, “buried in a caveat.”
