Knighthead Capital Management LLC is pushing TerraForm Global Inc. to appoint two new independent directors as the yieldco considers how to break away from its bankrupt sponsor, SunEdison Inc.
The hedge fund, which owns 6.4% of TerraForm Global's outstanding shares, according to S&P Capital IQ, on Jan. 27 urged the company's board to add SZR Consulting President Nils Larsen and SAGE Capital Investments CEO Neal Goldman to its Corporate Governance and Conflicts Committee, saying an "inadequate" takeover bid earlier this month from Brookfield Asset Management Inc. highlighted the need for "more independent directors."
TerraForm Global and its sister yieldco, TerraForm Power Inc., agreed on Jan. 23 to negotiate a potential acquisition exclusively with Brookfield, which has pursued the companies for months. Knighthead managing members Thomas Wagner and Ara Cohen, in a Jan. 27 letter to TerraForm Global's board, said Brookfield's offer represents a premium of between 10 cents and 20 cents per TerraForm Global share compared to a premium of between 50 cents and $1 per TerraForm Power share.
While SunEdison is "incentivized to liquidate its positions in both [yieldcos] to address the ongoing costs of bankruptcy and burdensome corporate and administrative expenses," TerraForm Global's Class A shareholders "could be best served by pursuing a non-sale alternative," Wagner and Cohen said, adding that TerraForm Global's board "has a track record of making decisions that are not in the best interests of the Class A shareholders."
A new direction
The Knighthead executives pointed to a November 2015 episode in which SunEdison overhauled TerraForm Global's Corporate Governance and Conflicts Committee and then convinced the reconstituted board to make a $231 million prepayment to SunEdison for solar projects in India. It turned out SunEdison needed the money to pay off a margin loan, while at least some of the India projects appear to have been marketed to third parties and cross-funded or cross-collateralized in violation of project lending agreements.
SunEdison holds about 36% of the economic interest and 98% of the voting interest in TerraForm Global, according to filings in SunEdison's Chapter 11 proceeding in U.S. Bankruptcy Court for the Southern District of New York.
Rather than sell the company to Brookfield, Wagner and Cohen said TerraForm Global shareholders would be better served if the yieldco found a new sponsor or operated as a standalone company, with the sale of projects in South Africa used to offload debt and repay corporate bonds.
TerraForm Global declined to comment on Jan. 27. At the end of October 2016, the company owned 989.5 MW of wind and solar power plants in India, Brazil, China, Malaysia, South Africa, Thailand and Uruguay.
Wagner and Cohen also raised concerns about a memorandum of understanding that TerraForm Global signed with SunEdison that is aimed at resolving claims between the companies. The agreement calls for TerraForm Global's $2 billion in claims to be settled for between $73 million and $77 million, the Knighthead executives said, adding that TerraForm Global's board should disclose the full text of the agreement to shareholders.
"The Board additions we propose will ensure that the Board's strategic alternatives decisions are not unduly influenced by [SunEdison] and that the settlement with [SunEdison] is negotiated at arm's length with appropriate consideration of the best interests of the public shareholders," Wagner and Cohen said.
TerraForm Global's 10-person board includes seven independent directors, according to S&P Capital IQ.