Tag Archives: ideas

Terraform Power’s Recent Moves Support Dividend Growth Of At Least 15% In 2016

Summary Terraform Power closed the first part of their planned transaction with Invenergy, 832MW of net wind power plants, increasing their current portfolio from 1.9GW to 2.8GW. I found it interesting that the company ended up changing the financing package for this transaction, which is expected to deliver unlevered CAFD of $139mil in 2016. Terraform also recently updated their purchase agreement with SunEdison for the producing assets of SunEdison’s deal to buy Vivint Solar. The updated deal projects that Terraform will pay $799mil to purchase 470MW of producing assets. These assets should produce annual CAFD of around $73-75mil. Both transactions support an increased dividend in 2016. The actual amount will depend on the timing of the transactions, but I expect 2016 exit rate of at least $1.60/share. Terraform Power (NASDAQ: TERP ) has had a pretty busy last couple of weeks. The company completed a large part of their planned transaction with Invenergy on Wednesday, buying 832MW of wind assets. This comes on the heels of the announcement last week of a renegotiation of the terms of SunEdison’s (NYSE: SUNE ) purchase of Vivint Solar (NYSE: VSLR ). The updates have removed many of the concerns investors have had with TERP, and the stock has responded in kind, as it has almost doubled from its late November lows. As I explain below, these transaction also support a continued dividend increase in 2016. TERP data by YCharts TERP came out with solid 3rd Quarter results in early November, but management’s unwillingness to confirm their previously estimated 2016 dividend increase to $1.75, and liquidity concerns at sponsor SUNE, led to the stock plunging over the next two weeks $6.73. At that point, the current yield was 20%. The market finally came to its senses when David Tepper announced a large stake and sent an open letter to management. Invenergy Transaction: Sources/Uses of Fund Changed One of the interesting takeaways from TERP’s announcement of the Invenergy transaction is the fact that they changed the way they ended up financing it. Back in July when the deal was made, the plan (see page 17) was to place half the MW into TERP immediately, and hold the other half in a SUNE warehouse. From August thru the 3Q earnings call in November, the plan (see page 18) was to only drop down 265MW and place the rest in a structured warehouse. Now it seems that management has decided to place all of the projects directly into TERP immediately. Sources of Cash   Uses of Cash   Non-Recourse Project Debt assumed or incurred with respect to transaction $801m 832MW of Wind Assets located in US and Canada $1,962m Pro-rata portion of $500mil new non-recourse term loan $417m     Cash on Hand (incld proceeds from TERP $300mil senior note offering in July 2015) $744m       $1,962m   $1,962m The press release notes that, “once all projects are operational, the first year adjusted EBITDA (before minority ownership) is expected to be $147 million, and unlevered CAFD (before all project and HoldCo debt payments) is expected to be $139 million.” Unfortunately, this doesn’t clarify how much we should expect the project and HoldCo debt payments to be, so it’s tough to predict how much of the unlevered CAFD will actually be available for dividend payments. My best estimate is to use the initially projected cash on cash yield of 8.4%, which equates to about $62mil (8.4% x $744mil cash on hand). We’ll have to wait for TERPs 4Q results for more details. The new $500mil term loan charges LIBOR + 5.5%, with a 1% LIBOR floor, meaning that TERP is currently paying 6.5%. It matures in 2019 and can be prepaid anytime, so it’s very likely that TERP will refinance this as soon as they can organize something with better terms. Vivint Transaction Terms Improve Last week TERP and SUNE announced that they had improved the terms of the Vivint transaction. TERP was able to reduce their initial purchase commitment from $922mil down to $799mil, by only paying for completed installations, and paying a reduced fee of $1.70/MW. The final total will depend on the actual number of producing MW transferred when the Vivint deal closes sometime during Q1 2016. In their Q2 earnings presentation, management noted that they expected the 523MW to generate average unlevered CAFD of $81 annually, so I project that the 470MW delivered at close will generate $70-75mil annualized unlevered CAFD. Considering the fact that TERP used substantially all of their cash on hand at the end of Q3 to fund the Invenergy transaction, it’s likely that they will be drawing on their revolver for much of the $799mil. The revolver’s rates are currently under 3%, so the annual interest would be about $24mil. Thus, I expect final CAFD to be about $50mil. 2016 Updated CAFD Projection Based on their 3Q presentation, TERP expected to generate CAFD of about $208mil before taking into account the Invenergy and Vivint transactions. If we assume that the Vivint transaction closes by the end of Q1, we should see annualized CAFD at the following levels next year: Quarter End Q1 Q2 Q3 Q4 Annualized CAFD $270m $320m $320m $320m CAFD distributed (85%) $230m $272m $272m $272m Per Share Quarterly Distribution $.35 $.40 $.40 $.40 The quarterly distribution estimates include the effect of SUNEs IDRs. I don’t expect TERP to actually increase the dividend to $.40 for Q2, even though it seems that operations would allow this. Rather, it’s likely that they will prefer to show steady quarterly increases up to $.40/share in Q4. This confirms my view that these transactions will cause TERP to increase their dividend by at least 15% over the next year.

Is Now The Time To Look At Floating Rate Bonds?

Summary Now that the Fed has begun raising rates, investors should refocus on risk minimization over yield maximization. Investors reaching for yield in securities like MLPs and high yield bonds have been hurt badly since the beginning of 2014. The iShares Floating Rate Bond ETF focuses on short term investment grade floating rate notes and carries an effective duration of just 0.14 years. In light of the Federal Reserve’s persistent zero interest rate policy, many investors have traveled further down the risk/return spectrum in order to improve yields on their portfolios. Anybody that’s dabbled in MLPs or high yield bonds over the past two years probably knows very well the risks that come with reaching for yields. The ALPS Alerian MLP ETF (NYSEARCA: AMLP ) is 40% off of its recent high while the high yield bond index is down over 20%. AMLP Total Return Price data by YCharts Now that the Federal Reserve has finally begun moving away from its zero interest rate policy and rates are slowly on their way back up, it might be time to focus more on principal preservation instead of yield maximization. Staying on the short end of the yield curve can certainly help accomplish that task but floating rate bonds should also be a consideration. The iShares Floating Rate Bond ETF (NYSEARCA: FLOT ) is the biggest floating rate note ETF out there at nearly $3.5B in assets. Its current yield of 0.5% won’t necessarily get income investors excited right now but its risk mitigation characteristics will once rates begin moving significantly higher. This ETF is benchmarked to the Barclays US Floating Rate Note

A Comprehensive Guide To Russia ETFs

After struggling with falling energy prices and western sanctions following the Ukraine crisis, Russia seems to be coming back on track. The Russian benchmark stock index, the Micex, recently touched its seven-year nadir while major ETFs tracking the Russian equity market have been reflecting gains. Much of the recovery in the country is linked to the oil and gas industry as the state derives about half of its revenues from the industry and 25% of its GDP is based on it. Oil prices have been recovering on rising geo-political tensions across the world ranging from the situation in Syria and Northern Iraq to the recent downing of a Russian jet by Turkey. International benchmark Brent Crude reached its two-week high of above $46 recently, a rebound from the six-year low of roughly $43 in August. The impact of the Syrian crisis may look short-lived but that’s not the end of the story. Recently, Saudi oil minister indicated at a possible cooperation between OPEC and non-OPEC nations to deal with the over-a-year-long production turf war to stabilize the oil market at their meeting on December 4. Stabilization in Russian ruble is another reason for the inflow in Russian ETFs. A weak ruble in the past has been the major factor for investors’ distaste for these ETFs as they lower dollar-denominated returns. Ruble has rebounded about 34% from its year-to-date low of around 50 to around 65 against the greenback currently. In fact, Goldman Sachs (NYSE: GS ) expects ruble to be one of the good performing currencies in 2016 along with the U.S. dollar and the Mexican peso. Moreover, increasing prospects of cooperation between Russia and the west over the war against the extremist group Islamic State have been boosting investor confidence. This led to the possibility of the U.S. lifting economic sanctions imposed on Russia following the Ukraine crisis. Recently, the International Monetary Fund (IMF) released projections that indicated stabilization in the Russian economy in 2016. IMF expects the economy to contract only 0.6% next year following a 3.8% squeeze in 2015, given the impact of lower oil prices. It further predicted inflation to fall to 12.7% at the end of this year and will continue to do so in 2016 from the current rate of 15.7%. It also hinted at improvements in the trading situation in the country despite its high dependence on oil exports. Below we discuss three ETFs tracking the Russian equity market that posted double-digit gains in the year-to-date time frame (as of November 25, 2015). Investors should closely monitor the movement of these ETFs in the days ahead, particularly following the OPEC meeting next week. Market Vectors Russia ETF (NYSEARCA: RSX ) This is the most popular ETF with an AUM of nearly $2 billion. The fund tracks the Market Vectors Russia Index with the highest exposure to the energy sector (42.9%), followed by materials (17.8%) and financials (13.9%). It has a basket of 37 stocks with top three holdings including Sberbank of Russian Federation, Gazprom ( OTCQX:GZPFY ) and Lukoil ( OTCPK:LUKOY ). The ETF trades in a solid volume of 11.9 million shares per day and charges 63 bps in annual fees. It added 19.7% in the year-to-date time frame and has a Zacks ETF Rank #4 (Sell) with a High risk outlook. iShares MSCI Russia Capped (NYSEARCA: ERUS ) This ETF tracks the MSCI Russia 25/50 Index, measuring the performance of equity securities in the top 85% by market capitalization of equity securities listed on stock exchanges in Russia. The ETF with a basket of 27 stocks is also heavily weighted to energy sector (53.4%) followed by financials (18%) and materials (9.8%). Gazprom, Pjsc Gazprom and Sberbank of Russia are the top three holdings in the fund. ERUS has an AUM of $240 million and exchanges roughly 411,000 shares in hand per day. It charges 62 bps in annual fees and returned around 16.8% so far this year. It has a Zacks ETF Rank #4 with a High risk outlook. SPDR S&P Russia ETF (NYSEARCA: RBL ) RBL follows the S&P Russia Capped BMI Index with a basket of 43 stocks. It also gives the highest preference to the energy sector (47.1%) followed by financials (14.8%) and materials (11.3%). Gazprom, Lukoil and Sberbank occupy the top three spots in the fund. The product has amassed around $26 million in assets and trades in a paltry volume of roughly 9,300 shares per day. It charges 59 bps in investor fees and gained 17.8% in the year-to-date period. It carries a Zacks ETF Rank #4 with a High risk outlook. Original Post