Were they lead to, or pushed off the cliff?
“Vision without execution — is hallucination” — Thomas Edison
Remember SunEdison? The bankruptcy of SunEdison took place … only 3 years ago — so let’s take a look under the covers and scrutinize what really happened …
After filing for Chapter 11, SunEdison’s CEO, Ahmad Chatila - has turned stakeholders’ dreams of wealth into nightmares of poverty. So, how such a rising star of solar PV industry and renewable energy’s poster boy fell from grace like a stone? After all, it wasn’t another Theranos selling hand-waving and “imagine the future” narratives …
Who was SunEdison and why did they matter?
Not surprisingly, as the initial shock settled in — the blame game began. After all, when more than $10B in market capitalization evaporates in less than one year, and the largest solar PV developer in the world goes under — class-action law suits can be expected.
Yet, even in the best of times, warning signs were there. Over the last few years prior to bankruptcy, the project acquisition strategy at SunEdison was “questionable”… to say the least. Their acquisition mantra of winning auctions at all costs, left me wonder: where was the accountability?
I have tried, repeatedly, to run financial models and validate the economics based on Power Purchase Agreements (PPA) awarded to SunEdison in the last 12 months before they failed. And every time I did so, my conclusion was as follows:
In order to generate even a meager single-digit equity IRR — SunEdison needed to lever the acquisition costs with a debt to equity ratio (D/E) of over 95%
That’s a lot of debt!
Since most long-term PPAs are awarded for 15–20 years, one needs to secure: fixed, long-term and low-interest non-recourse debt — to make it work. Yet we saw SunEdison acquiring short-term debt and refinancing such debt with even shorter debt at even higher interest rates, repeatedly! And that’s a true recipe for disaster.
In spite of the above, however - is there more blame to go around beyond SunEdison’s management? Let’s take a look at the … Short Sellers.
I have watched with great concern the sheer volume of shorts on SunEdison’s stock — which significantly escalated during the last 12 months prior to bankruptcy.
Don’t get me wrong: the practice of selling security that is not currently owned, with the intention of later repurchasing the security at a lower price — is perfectly legal. This allows investors to profit from a drop in the price of the security by repurchasing the security later — to cover the short. However, abusive and short selling and putting the company into bankruptcy so that short sellers never have to even buy real shares to cover — is not legal.
In this case, SunEdison may have been subjected to “naked short selling” — a short selling without even borrowing the shares within the clearing time period. Such trades are considered “failed to deliver” trades and will continue to sit open until the short-seller either closes out the position or borrows the shares.
Robert Shapiro, a former undersecretary in the Commerce Department under President Bill Clinton has claimed that naked short selling has cost investors $100 billion and driven 1,000 companies into the ground. I kid you not!
Naked short-selling is a problem because even when proof exists and the total number of naked shares exceeds 10, 20 and even 50 times the number of issued and outstanding shares of the corporation — a successful fraud investigation may take years, and is notoriously difficult. Meanwhile, the company goes under, jobs are lost and unsuspecting shareholders lose everything.
Interestingly enough, the debate about the danger of naked short selling has intensified since the last financial crisis of 2008. There are many calls to ban the practice all together. Nobody disagrees that naked short selling is extremely difficult to ascertain and enforce. So, what gives?
Most of the status-quo proponents quote the findings of a single study dismissing short selling bans. Furthermore, the study concludes that all the bans were detrimental to market liquidity. How convenient … Well, they used to laugh at and dismiss the studies linking tobacco to cancer, too!
IMHO, since the study dealt with a temporary ban on short selling that was introduced during the financial crisis — it hardly offers any objective assessment. It’s probably no different than hitting a person over the head with a 2 x 4 — and then making an observation that the subject felt dizzy….
Well, Ahmad Chatila is no Jigar Shah, a true visionary and the first CEO of SunEdison. Perhaps Ahmad never asked Jigar for advice. Too bad. I remember the president of TechData almost 20 years ago recounting me “The 3 Envelopes Story” — that may apply to Ahmad’s predicament:
A new CEO of a large corporation has been hired. He asks the outgoing CEO for a word of advice. The outgoing CEO handed him three numbered envelopes and suggested that he opens these, in sequence — each time the going gets tough.
After the first 12 months, the business took a nose-dive, so the new CEO took out the first envelope. The message read: “Blame your predecessor” — which he did.
The business stabilized for a while but after another year, or so, the company was again experiencing a serious challenge. Without delay, the CEO opened the second envelope. The message read: “Reorganize.” He did just that — and the company, once more, rebounded.
After few more years, the company fell on extremely hard times. The CEO opened the third envelope. It said: “It’s time to prepare your own three envelopes.”
The bottom line: Only time will tell the REAL story behind SunEdison’s collapse. Meanwhile, how many more companies are we going to watch file for Chapter 11 — only as a result of naked short selling?
Oleg Feldgajer is President & CEO of Canada Green ESCO Inc. Oleg is positioning the company to become a leader in financing AI enhanced green energy projects and ventures. CGE’s mission is to guide DISRUPTIVE businesses in ENERGY & TRANSPORTATION toward profitable business models. Oleg is passionate about such mission, and firmly believes that without AI based innovation, we will all prematurely choke on polluted air and dirty water. CGE delivers 100% financing (levered and unlevered) to its clients — and utilizes large equity pools, and non-recourse debt. Oleg offers creative, fresh ideas to open-minded businesses — that embrace both: logic AND opportunistic intuition. CGE stands against mediocrity & its modus operandi is quite simple: If CGE is not invited to join your BOD, or Advisory Board — we failed!