Friday, February 5, 2016

What's a Yieldco and How's it Killing Wall Street?

On August 6, billionaire hedge fund manager Leon Cooperman took the unusual step of dialing into an earnings call for one of his fund's holdings and asking a question.

It was a second-quarter earnings call for SunEdison, a solar-energy company that went public in 1995. At the time, Omega was the 11th-biggest shareholder of SunEdison, with 8.8 million shares.

It's a large stake, but it is still unusual for Cooperman to pick up the phone to publicly ask a question on a company's quarterly conference call.

These were no ordinary circumstances, however. After enjoying the benefits of a classic Wall Street hedge fund pile-in – when the smartest money in the stock market wants nothing more than to buy, buy, buy – SunEdison was crashing.

Cooperman wanted to know if its executives would throw him and other investors a bone and buy back some stock. They responded, in no uncertain terms, that they would not.

Since that call, SunEdison's stock has fallen a further 80%. Its two subsidiaries, TerraForm Global and TerraForm Power, have seen their stocks fall 64% and 73%, respectively. There have been management shake-ups at both the subsidiaries.

The stock price collapses have burned some of the biggest investors in the business, including Cooperman, David Einhorn of Greenlight Capital, and David Tepper of Appaloosa Management.

And it is all because of doubts over a type of financial engineering that fueled explosive growth in the solar sector for two years, and now has investors questioning the entire sector.

What's a yieldco?

The shift in fortunes has been brutal. At an event in October last year, David Einhorn of Greenlight Capital called SunEdison "a well‐run, financially savvy company, benefiting from an open-ended growth opportunity trading at a bargain price."

He priced the stock at $32 a share. It's now trading at about $3.

The "open-ended growth opportunity" Einhorn was referring to is made possible by something called a "yieldco." It's the magical instrument that fueled SunEdison's growth and caught Wall Street's eye in the first place.

by Linette Lopez, Business Insider |  Read more:
Image: Carlos Barria/Reuters