Guggenheim: Sale of CAFD, NYLD cast doubt on the yieldco space

Yieldcos – the holding vehicles for electricity generation projects which have been created in the past few years by many of the largest renewable energy developers – have seen many ups and downs over the last few years. As the latest wave, these investment vehicles have been increasingly bought up by large asset management companies, due to their sponsors going bankrupt, downsizing or choosing other priorities.

Just as SunEdison started the solar yieldco trend with its creation of TerraForm Power (NASDAQ:TERP) and later TerraForm Global (GLBL), the sale of these two companies to Brookfield during SunEdison’s bankruptcy heralded the sale of other yieldcos with substantial solar and wind assets. Last week two major deals were announced in this space, with Global Infrastructure Partners agreeing to acquire NRG Yield (NYLD) and Capital Dynamics snatching up 8Point3 Energy Partners (CAFD) at a considerable bargain.

And while the sale of both companies were in the works for many months, the details of the sale of 8point surprised many investors. First Solar and SunPower have agreed to sell off the entire company at $12.35 per share, which Guggenheim Securities estimates represents an roughly 18% discount to the company’s three-month average trading price before the deal was announced.

Meanwhile Brookfield has also entered a deal to acquire Spain’s Saeta Yield (SAY), but this time is paying a premium of approximately 20%.

In a research note published yesterday, Guggenheim has analyzed the implications of these transactions, noting that these wildly differing valuations affects already shaky investor confidence in the space.

In particular Guggenheim notes what every investor who has been on an 8point3 results call will doubtless echo – the divergence between the company’s emphasis on the inherent value of the stable cash flows and the quality of its assets and how little this is being valued in its sale to Capital Dynamics.

“We can only attribute that to the risk characteristics of the underlying cash flows which private buyers with access to non-public data were better positioned to assess vs. their public market counterparts,” observes Guggenheim’s team.

Guggenheim says that this divergence shows the struggle that public market investors have had in properly valuing yeildcos, and “does nothing to instill confidence in this space”.

And while it was not mentioned in the note, other analysts have suggested that certain yieldcos too often serve the needs of their sponsors and not their investors. This can be argued with 8point3, which First Solar and SunPower talked up when it was in their interests, and then sold off at a discount which doubtless burned the fingers of many who had believed statements about the inherent value of the company’s assets.

Guggenheim notes that the uncertainty in this space puts pressure on the two remaining yieldcos, Pattern Energy and Atlantica Yield, to perform consistently. Both hold substantial wind assets.