Here’s a thing that I wrote back in 2011, while parsing an Oliver Wyman report contending that the next hypothetical banking crisis would stem from over investment in commodities: “… as soon as investors start to doubt what constitutes ‘real’ demand for commodities and what’s pure speculation, they’ll head for the exits en masse, which will lead to a collapse in commodity prices, abandoned development projects and bank losses.” Though major losses haven’t occurred at the banks yet (just the famously non-bank Jefferies), we have seen the effects of the collapsing commodities super cycle elsewhere. Yieldcos, MLPs and commodities traders like Glencore and Trafigura — once the darlings of the financial world — are facing increasingly tough questions about their business models and, consequently their access to capital markets.
So here’s my latest post on an ongoing theme, this time about SunEdison and its yieldco, TerraForm Power:
The website of SunEdison, the renewable energy company, is a virtual smorgasbord of sunshine and light. “Solar perfected,” reads one slogan splashed across the page. “Welcome to the dawn of a new era in solar energy,” reads another banner over a pink-hued sunset.
While SunEdison’s marketing materials are firmly in the clouds, its share price has sunk to earth. The company is one of a batch of energy firms that have spun off their completed projects to public equity investors through vehicles known as “yieldcos,” only to see the share prices of those vehicles subsequently tank.
Now SunEdison and one of its two yieldcos, TerraForm Power, face additional questions about the health of their collective funding arrangements. Those concerns are emblematic of a wider problem for energy and commodities companies that have relied on eager capital markets to help finance their staggering growth in recent years.
Lured by the higher yields on offer from funding such projects, investors have stepped up to finance a host of energy-related products in recent years, contributing to a glut in supply that has spurred a dramatic collapse in commodities prices. That’s helping to fuel additional market scrutiny of commodities’ players—from giants such as Glencore to U.S. shale explorers and solar panel operators.
The concern now is that funding structures built on that fragile dynamic are apt to collapse should investors come to believe that the financing of latent commodity demand has far outpaced actual growth.
Investors are asking tough questions about ‘yieldcos’