SunEdison and TerraForm outline nearly $3.9 billion funding for First Wind buy and future growth

By Paul Deckelman

New York, Nov. 18 – Solar power developer SunEdison, Inc. and wholly owned indirect solar plant- operating subsidiary TerraForm Power Inc. fleshed out some of the financing details on Tuesday of their previously announced $2.4 billion transaction to acquire wind-power developer and operator First Wind.

“It’s a very complex deal on the surface,” Maryland Heights, Mo.-based SunEdison’s president and chief executive officer, Ahmad Chatila, declared at a morning presentation to the company’s investors, “but incredibly, incredibly value creating.”

He asserted that the acquisition of Boston-based First Wind and its combination with the company’s existing assets and operations will make SunEdison “the leading renewable energy developer in the world.”

Bank lenders come aboard

“Overall, the banking relationships have brought us [nearly] $4 billion worth of capital” to finance the transaction itself as well as to fund the combined company’s future growth,” Chatila said.

“So the deal is funded up front, de-risked, and also there is a $1.5 billion warehousing facility that allows us to grow the business in the future efficiently.”

The transaction is structured so that SunEdison and TerraForm will pay about $1.9 billion of the $2.4 billion purchase price for First Wind up front, with the remaining $510 million to take the form of an earn-out – payments that are to be made upon First Wind’s completion of certain projects.

SunEdison will pay First Wind $1.036 billion up front – $696 million in cash and a $340 million note – as it acquires over 1.6 GW of pipeline and backlog projects, which are expected to be operational in 2016-2017, as well as an additional 6.4 GW of project-development opportunities. The up-front consideration includes the assumption of $361 million of First Wind debt. It will pay the other $510 million upon completion of the backlog assets between 2015 and 2017.

Its chief financial officer and executive vice president, Brian Wuebbels, noted that “over half of the consideration from SunEdison is actually not being paid up front. It’s actually going to be fully aligned to the seller and fully aligned to the execution of the backlog in the first two years, so when that backlog executes, then we’ll pay the earn-out.”

The cash portion of the up-front payment will be funded via an $815 million committed bridge loan facility to be provided by lenders Barclays, Morgan Stanley, Goldman Sachs and Macquarie Bank.

Beltsville, Md.-based TerraForm will meanwhile pay $862 million to First Wind to acquire 521 MW of contracted wind-generation assets and add 1.6 GW to its list of call-right projects scheduled for dropping down from its parent company in 2016-2017.

To fund that consideration, it has put in place a $1.55 billion committed bridge loan facility to be provided by lenders Barclays, Morgan Stanley, Goldman Sachs, Citigroup, Bank of America Merrill Lynch and Macquarie Bank.

Besides funding TerraForm’s up-front transaction costs, its bridge facility will also finance $688 million of debt recapitalization.

TerraForm’s chief executive officer and president, Carlos Domenech Zornova, who also wears the hat of executive vice president of SunEdison and president of the parent’s Sun Capital unit, said that the bridge facility “is going to give us flexibility to [obtain] the most optimal capital structure.”

The bridge “will give us a six-month window of flexibility to optimize funding.” He said that the bridge facility would be retired with a note offering, expected to be $800 million, plus an issuance of equity.

“We are considering and evaluating how much equity we’ll issue, so we’ll put as placeholder there for $700 [million], although this will change, based on market conditions.” The company also has $50 million of cash it can use to help retire the bridge loan.

He said that on a pro forma basis, TerraForm is going to maintain its leverage ratio at the holding company level of debt as a multiple of cash available for distribution at 3 times, “which is really important from our perspective to maintain a solid credit rating, but also to create flexibility for the future.”

The company’s operating assets will have no project-level debt pro forma for the acquisition, but Domenech said that it has the flexibility to bring project debt, “so we have a lot of levers.”

He also said that TerraForm will expand the size of its revolving credit facility by $310 million to $450 million at the close of all of the transactions, “so we’re taking it yet a notch above, which, again, creates tremendous flexibility for us in the future.”

TerraForm’s total fourth-quarter liquidity pro forma for completion of all of the transactions, should grow to $665 million from the $475 million of cash, revolver availability and other funding sources the company had on hand at the end of the third quarter on Sept. 30, “so that gives us tremendous firepower, whether it is to absorb accelerated drop-downs [from parent SunEdison] and potential opportunities for M&A and certainly to insure that we bring accretive value to our shareholders.”

Warehouse facility for growth

Looking to the future, SunEdison plans to fund its growth efforts via a committed $1.5 billion drop-down warehouse facility, which will be funded by lenders First Reserve Corp. as well as Bank of America Merrill Lynch, Barclays, Citigroup, Goldman Sachs, Morgan Stanley and Macquarie Bank.

Wuebbels noted that First Reserve, which is committing $500 million of equity, has been “a long-time partner” for SunEdison.

He said that to bring the overall cost of the facility down, SunEdison would be bringing two tranches of debt – a $600 million term loan and a $400 million revolver, “so viewing the timing of all of these projects, we won’t be paying fees if we are not drawn on this revolver.”

He said the “this structure will allow us to flex this facility up or down as we meet the ebbs and flows of the build-out schedule, for not only the backlog in the wind projects, but also solar projects. So the facility is being designed not just for wind, but also for solar.”

Once a solar or wind project in the pipeline is ready for construction, Wuebbels said, “SunEdison will drop it into the vehicle, and effectively, First Reserve and this facility will procure this project from SunEdison” and will fund the working capital for the project. Once the project is complete, he continued, “the warehouse also has the flexibility to hold the project,” rather than being immediately dropped down to TerraForm. He said this “obviously provides additional flexibility for TerraForm, to time when it wants the drop-downs to occur.”

The CFO further noted that the warehouse facility will be non-recourse back to SunEdison or TerraForm.

He called the warehouse facility “probably the most impactful thing in addition to the transaction itself. This is really going to fund the growth of this business.”

He said that “we believe that this structure is something that we’re going to be able to scale into the future and continue to evolve,” which he said would be done “by adding on to the term loan, by adding on to the revolver size and even looking at other sources of equity to drive down the cost of this facility over time.”

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