sunpower SPWR S
December 20, 2023 - 4:48pm EST by
2023 2024
Price: 4.40 EPS NM NM
Shares Out. (in M): 175 P/E NM NM
Market Cap (in $M): 750 P/FCF NM NM
Net Debt (in $M): 203 EBIT 0 0
TEV (in $M): 950 TEV/EBIT NM NM
Borrow Cost: General Collateral

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Sunpower faces an extreme liquidity problem.  I suspect they need to raise $100-300mm prior to their current waiver on their bank loan agreement in early January.  If they don’t, I suspect SPWR will be forced to file for bankruptcy in early 1Q24.  I would guess that the offering is in the form of a rights offering.  I am assuming that trade credit are tightening terms after the going-concern notice.  further, I suspect that homeowners will balk on placing deposits with SPWR with this issue festering.  


What is Sunpower?


Sunpower (“SPWR”) is a wholesaler of residential retail solar panel systems.  SPWR warehouses equipment and facilitates project development.  SPWR operates in two ways.  A)  SPWR engages with 3rd party developers who find residential customers who want to convert to solar.  The 3rd party makes the sale with the residential customer.  The 3rd party buys the equipment from SPWR.  As part of the value proposition, SPWR will provide technical sale assistance.  B)  SPWR has an internal team that sells to residential customers who build the project using SPWR’s equipment.  SPWR does NOT take ownership of the panels and lease them out to customers like Sunrun or Sunova.  Once the project is installed, SPWR’s economic interest is over.  Sunpower had a legacy solar panel supply agreement with Maxeon (“MAXN”), which ended abruptly as SPWR wasn’t paying them.  Maxeon was spun out of SPWR years ago.  Historically, MAXN had a technically superior solution, which drove developers to the product and modestly assisted SPWR sales.  This ever-so-modest technical advantage has faded.  In addition, the agreement with MAXN had a take-or-pay component and a required minimum volume commitment.  As a result, SPWR wanted out of its exclusive supply agreement.  This drove the conflict in 2H23, which ended in a termination. 


Ownership:  Total is a controlling shareholder with just over 50% stake.  However, the Total 50% stake is owned via a JV.  The JV is split 50/50 with a PE shop.  The PE shop sold an asset to Total and took cash plus the 50% stake in the JV as compensation.  In reality, Total only owns 25% of SPWR.  Further, the PE shop most likely has far more capital discipline.  Unless a rescue investment makes sense, the PE shop won’t participate.  Not only does this mean that Total has a guiding force/discipline in their approach to this investment… if they decided to invest when the PE shop doesn’t, they better have a really good explanation to the investment committee. 


What is the problem?


Horrendous economics:  Sunpower rose to its leading market share position in the US when its competitors were racing to take market share with free capital and dubious economics.  This is a classic winners curse.  They won the race to destroy the most value.  Their prize is running out of money when the bottom falls out of the market.  Even during a remarkable demand acceleration in 2022, SPWR was EBITDA negative.   The company is a perpetual value destroyer.  While the rise in the cost of capital could drive improved economics over time, this is only likely to occur after a substantial washout, and there is no guarantee that legacy suppliers won’t return to their old ways.  Given the legacy and uncertainty on the path forward, a new capital provider is unlikely to assume that there could be a marked improvement in economics, especially after the implosion of all things renewable.


Fundamentals moving from boom to bust.  California had a large tax incentive which drove a surge in demand that just expired.  Further, the surge in rates and drop in natural gas has compromised solar economics.  I suspect that solar recovers substantially over time.  However, the next 2-4+ quarters are likely to be extremely challenging, even with the modest improvement in the 10 year yield.   SPWR has the most exposure to California at ~50% of sales.


Solar panel extreme deflation:  solar panel prices are down 35% YTD.  This creates two problems.  1)  their inventory is completely mismarked.  They either need to write it down materially or EBITDA burn will go decidedly negative.  2)  50% of the business is selling panels wholesale.  If they can move the same number of panels at 35% lower per panel, this is a 17.5% drag on sales and gross profit dollars.


Given the pull forward in in demand in California and dramatic fall in solar panel prices, SPWR is going to really struggle to hold the topline flat next year.

I assume the only way they can hold topline is via price concessions.  If I cut gross margins to 14% on a flat topline, I think they need to cut $100mm of costs to hit the sellside estimates.  Everyone is getting lean.  I would guess that cost savings are mostly passed to customers.  Given the headwinds, I would not expect 2024 to be the year for SPWR to convert to EBITDA+.


Extreme Liquidity shortage: I strongly believe that SPWR is facing a liquidity crisis and needs $200-300mm to avoid collapsing in 2024.  I suspect SPWR files or does an enormous rights offering in the coming weeks.


SPWR made a tremendous error in 1H23, misjudged demand, and ordered a massive amount of solar panels.  These panels arrived after demand declined markedly in 2q-23.  The Maxeon panels may have been priced at a premium, too.  This sucked up nearly all of SPWR’s liquidity.  With demand dropping sharply, the price of the panels went into freefall – dropping 30-40%.  SPWR continued to burn FCF, forcing SPWR to draw all of its liquidity. SPWR cleared its minimum liquidity hurdle of $100mm in 3q-23.  However, it may have stopped paying Maxeon to get there.  SPWR then turned to its enormous inventory balance to fund its negative free cash flow.  As a reminder, inventory forms the collateral for the bank group. 


Imagine the above from the prospective of the bank group making SOFR+ to participate in this disaster…   A company with a terrible historical cashflow profile is dropping into a decided down-draft.  They drew credit facilities to buy inventory at the top of the market.  My inventory value is dropping rapidly, and the company is converting my collateral into cash to fund its negative free cash flow.  If there is a recovery in the industry, they have zero resources to fund the working capital for the recovery.  It seems fair to assume that the bank group watched the minimum liquidity covenant closely as 3Q approached.  The bank group wished to force management in with the leverage of a covenant breach to force changes.  While the company didn’t breach the minimum liquidity covenant, the bank group was given another opportunity to reign SPWR in when they failed to provide timely 10K/Q on 10/24/23, triggering a breach.  How does the bank group underwrite to improved circumstances when SPWR destroyed so much value at the peak?  The answer is… I don’t see how they can.  They are faced with two paths… force the company to raise junior capital to pay down their balance or foreclose and liquidate the collateral.  The longer they let this company burn cash, the closer they get to impairment.  If the company cannot raise junior capital with Total as a 50% shareholder!, this is particularly telling too. 


As a result, I strongly suspect that upon breach on 10/24… the company hired restructuring counsel and bankers.  They met with the bank group, who told them to raise junior capital or they would foreclose.  The bankers rushed to find a lender to replace the bank group.  They pursued junior capital, too.


The board/Total was likely aware of festering problems well before the 10/24 breach.  Said differently, Total has realized that its investment was in harm’s way for at least the last two months.  The banks must have requested junior capital or an equity infusion, as they risk letting SPWR destroy their collateral to fund FCF burn until they are impaired.  Further, SPWR is tremendously reliant on trade credit.  The two primary ways they are reliant is 1) via trade credit from suppliers of solar equipment 2) homeowners and other counterparties that pay upfront deposits to get projects started.  As of 9/30/23, SPWR had $186mm of A/P and $232mm of contract liabilities. 


These counter-parties have some sense that SPWR refused to pay Maxeon this fall which must have put them on notice.  They have seen a marked decline in the stock price.  Then, they saw their failure to produce the 10k/Q, which caused a breach.  The last thing they needed to see was a going-concern letter.  That had to be the the last straw.  I would imagine all creditors are cash-on-delivery for the foreseeable future.  Away from trade creditors, other project developers must view SPWR as toxic now.  Perhaps a local installer is naïve to the issues.  However, I would guess that nearly all solar projects are competitively bid.  If so, the competing sales force is going to make the homeowner and project developers aware of this issue and the risk of placing a deposit with SPWR.  What happens if I start a project supplied by SPWR and SPWR fails to deliver?  I have to imagine that issue is having an immediate impact on their trade liquidity and ability to source business.  Whatever rescue financing is raised, this will mean it has to go higher.


In a weird twist, Total injected $25mm via the credit facility.  The bank group added another $25mm.  SPWR immediately drew all of these two facilities.  This has a handful of implications and raises questions.

  • Total was only willing to provide $25mm on a first lien basis.    
  • The bank group didn’t want to lend the full $50mm?
  • why does SPWR need the $50mm so desperately?  They had $103mm of cash.  Was this to allow them to clear the $100mm min liquidity covenant by YE?
  • It’s odd to lend a FCF- business more money to allow them to clear their $100mm min liquidity hurdle, especially as SPWR states that it will violate covenants upon the close of 4Q
  • Was this loan effectively a debtor-in-possession loan as pre-cursory to BK?  I actually doubt that Total would be bothered if that was the case.


If Total was going to attempt to save SPWR, it really should have acted more forcefully before the going concern notice was issued.  These two months have passed and Total did not step up… knowing full well there would be consequences… 1)  Trade credit moving to cash-on-delivery  2)  Immediate challenge to their business as counterparties steer clear.  To me, this suggests that Total isn’t interested in buying the remaining 50% either.  Further, it harbors real reservations about investing further capital on a 2nd lien or equity basis.  As to a 2nd lien, there is possibly enough collateral to get someone to lend but the last thing SPWR needs is more debt.


Why do they need that much?  It appears like the banks begrudgingly lent more capital to them.  I would guess they want to be paid down with a portion of the equity raise.  I would expect the banks to require $50mm.  Between now and the end of this crisis, I would expect working capital to be a further draw and potentially substantial.  They need some real cushion to the $100mm of min liquidity.


To conclude on liquidity:  SPWR ended 9/30/23 a hair over $100mm of minimum liquidity.  They almost certainly were negative EBITDA and burned substantial cash during 4Q as demand is down.  Now, their trade creditors are likely closing in.  Furthermore, I have to assume that their counterparties are wary of SPWR which limits their ability to sell solar projects, increasing the EBITDA burn.  Their largest shareholder seems to have shrugged and thrown its hands up rather than raced to their aid.  Typically, it takes 1-3 months to arrange a bankruptcy and file.  Given the working capital limitations, I wonder if this could escalate. 


Bank loan coverage: with $350mm of loans outstanding, the current assets clearly cover the loans even if heavily discounted.  However, the scary part of the current assets is the rapid decline in the balance and the plan to continue to burn it down to fund operations.  Given that current assets are the primary form of collateral and will require $50-100mm of fees to liquidate in bankruptcy, the banks should be wary of where this is headed without a cogent plan on how to turn this despite the decided headwinds.


Other kernels:  in many bankruptcies, the board will adjust management compensation to allow cash bonuses to retain management as their stock compensation is worthless.  Notably, the bank group insisted that no large payments were made to management.  1)  this tells me that the board may have already tried to make this payment in preparation for bankruptcy.  If not this, then the banks see this as a looming probably as they see a bankruptcy and want to pre-empt this step.  2)  if the banks don’t wish to retain management, this suggests to me that the bank group wishes to liquidate the asset.  The only contradictory evidence is the contribution by Total.  I don't think Total would have participated if the additional loan was a bridge to a DIP.  It appears that they were forced to invest to buy time while Total mulls its options.  It was probably the least they could do to buy the time.   It is truly telling to me that Total isn't sure what it wants to do.  It is clearly reluctant to invest further in this.


Valuation:  the market cap of this stock is still $700mm.  This is an enormous value for a stock that could be on the verge of liquidation or rights offering, with the 50% shareholder doing its least to avert the crisis.  The only reason I could see for Total to delay would be to allow the gravity of the situation to set in.  After which, a rights offering at $1/share or lower will not elicit as much of an outcry.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Expiration of the waiver 1/14/24

News reports around escalating problems

leaks regarding evaluating bankrutpcy

4q23 results and guidance

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