Cohocton Wind Watch: SunEdison Won't Go Bankrupt... And David Einhorn Might Have Proved My Point
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Thursday, April 21, 2016

SunEdison Won't Go Bankrupt... And David Einhorn Might Have Proved My Point


Citing Rule 10b5-1 and 10b5-2, Einhorn and Greenlight would be prohibited to sell with knowledge of material, non-disclosed information.
SunEdison in late-stage negotiations to sell 450-MW to Hinduja Group.
The near-term cash flow is the driver to get a deal done and emerge strategically forward.
Although battered, I am not yet convinced that a SunEdison (NYSE:SUNE) bankruptcy is in the near-term future for shareholders. In my last article, I proposed that the company would embark on a plan to sell some assets, change management and emerge badly bruised, but not dead. This week, nothing has changed that would cause me to change my thesis.
In fact, a couple of new reports and reliable deal speculation has worked to bolster my case and has provided the first step in the right direction.
First, it's now widely reported that a "company" is in direct talks with Hinduja Group, a company based in India, to sell a 450-MW power plant. The "company" in question is U.S.-based - however, no actual name was provided. But The Hindu Business Line, which published an exclusive to the story, directed investors to the likelihood that SunEdison would be the seller of the assets. If this is indeed the case, it sets in motion the plan I outlined earlier - that with just a little bit of wiggle room, SunEdison could get enough footing to gain the traction necessary to see itself through the second half of 2016, which is the period that management has projected to realize a dramatic increase in cash flow, the kind of cash flow necessary and able to start the turnaround story. The company just needs to get there.
As was pointed out in a prior Seeking Alpha article, the projections offered by company management on April 3rd and April 11th call for 2H2016 free cash flow of over $800 million - a projection based on the completion of three solar projects, which are between 57% and 93% complete, according to a SunEdison filing. Now, whether or not investors can hold value to what management tells investors is a choice made, and to each his own, but I believe management is telling investors quite clearly that if an immediate cash injection is received to clear this current challenge, the company can emerge quickly and regain its strong position as a leader in the solar world.
I am not suggesting an immediate growth plan for SunEdison, at least not yet. But utilizing the yieldco concept does have its merit, if managed properly. What happened to the company is a result of the easy money Wall Street bubbles that seem to emerge every other year or so. With a bond market that has been offering historically low interest rates, investors had to once again look to creative ways of producing a return on investment, with a decent level of security and an expectation of a regular and predictable dividend. And institutional funds certainly flocked to the yieldco model offered by SunEdison. In fact, for the filing period ending on 12/31/16, there were 453 institutional holders representing over 266 million shares. Except for the Greenlight sale reported on 4/17/16, we have no way of knowing who is still holding positions into the end of the second quarter.
It remains part of my contention that the market forces will intervene and not allow billions of dollars of investment losses to be realized. Keep in mind that when we say institutional funds, we are talking about vehicles of investment for retail holders as well as for other institutional funds. Remembering the Madoff days, "funds of funds" were investing into his scheme. But SunEdison is not a scheme, and for a relatively small amount of cash, the company can emerge and generate meaningful cash flows within sixty days of future operations, based on its own model. Investors just want a deal that keeps the company alive and allows investors the long-term prospects of realizing healthy gains in the future. Dilution is not a factor.
I understand the argument that the Greenlight share sale was the final message to the market that SunEdison is headed for a bankruptcy filing. However, I see it quite differently, and it's a second reason that supports my thesis that the company is not planning an imminent bankruptcy filing.
Because Greenlight has a sitting Board member in SunEdison, namely Claire Gogel, they would be bound by the material information clause incorporated into SEC Rule 10b5-1 and 10b5-2. The definition is clear, and I don't see where there is room for Einhorn to trade around a near-term or imminent bankruptcy filing. In my opinion, it would clearly violate the Rule.
Rule 10b5-1 states that:
Rule 10b5-1 provides that a person trades on the basis of material nonpublic information if a trader is "aware" of the material nonpublic information when making the purchase or sale. The rule also sets forth several affirmative defenses or exceptions to liability. The rule permits persons to trade in certain specified circumstances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract, or instruction that was made in good faith.
Rule 10b5-2 states that:
Rule 10b5-2 clarifies how the misappropriation theory applies to certain non-business relationships. This rule provides that a person receiving confidential information under circumstances specified in the rule would owe a duty of trust or confidence and thus could be liable under the misappropriation theory.
I further checked to make sure that a filing of a Form 4 or 13d was a defense to trading on material, non-public information, and I was unable to find a plausible defense that would allow such a trade to happen. It would be entirely unreasonable to believe that Einhorn would not have knowledge of a decision made by the Board and management to proceed towards a bankruptcy filing. In fact, with as many leashes that Greenlight put around SUNE management's neck, the idea that Einhorn would not have knowledge to a pending material event would be a stretch of conventional reality.
The trading action on the stock also indicates that investors are undecided as to what will happen with SunEdison. After the initial sell-off attributed to Einhorn cutting his stake, the shares rebounded sharply on Wednesday, trading higher by 28% before a modest pullback into the close. In my opinion, other investors could be theorizing that if Einhorn sold shares, a bankruptcy filing might not be a decided reality.
I have spent considerable time trying to find an "out" for his decision to sell, and with my assumption that he would have knowledge of boardroom activity, I can't find one. The rule is clear and there are no exceptions. Certain regulatory filings are required, and he made them. But that does not release him from stringent regulations regarding buying or selling shares while in possession of material and non-publicly disseminated information.
For these reasons, my thesis remains. SunEdison is too big to fail on many levels. From the "messy" court proceedings to the billions in losses to private and public equity funds, the damage would be too far-reaching to not have a lifeline thrown the company's way. Further, the recent trading activity does not indicate an imminent bankruptcy. Yes, the stock is beaten down to .34 cents; however, millions of shares are still changing hands on a daily basis, leading me to believe that I am far from being alone with my prophetic thoughts of glory days ahead.
Love SUNE or hate SUNE, it's a 50/50 debate at this point in time. But one thing is for sure. Regardless of the pounding on the table by some media outlets about the company's future, no one outside of the Board room knows for sure what SunEdison plans to do in the immediate future.
In my opinion, SUNE management views the second half of the year as its entry into the promised land and will do everything possible, including asset sales, to deliver the company to serenity. And it can't happen fast enough - we all need some "serenity now".


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