Month: May 2016

One year ago, SunEdison was the darling of the hedge fund world. It is now bankrupt. Moments ago, Jim Chanos revealed that (in addition to Tesla) he is also short Elon Musk’s SolarCity, sending the stock sliding.

But what is the bear case?

Well, courtesy of Axiom’s Gordon Johnson, here are some very specific reasons why Chanos may once again have a home run on his “short” hands. Below is his “big picture” summary:

SOLARCITY CORP. (SCTY – $26.45 – SELL)

 

Is The Entire Sell-Side Incorrectly Giving SCTY Credit For Cash It Can’t Access?

 

The Good, the Bad, & the Ugly. In a widely anticipated move (evidenced by the recent outperformance of SCTY’s shrs), yesterday SCTY announced its first-ever cash equity deal w/ John Hancock Financial (“JHF”). Under the terms of the deal, SCTY will sell 95% of the cash flows generated from a portfolio of 201MW of residential & commercial solar projects to JHF over the next 20yrs.

 

The Good: in return for the cash flows, SCTY will receive $227mn in upfront equity, while retaining a 5% minority interest over 20yrs; including tax equity investments + upfront rebates/prepayments, this transaction will raise $3.00/W in total financing (or ~$603mn), & reflects a blend of $2.35/W for commercial projects & $3.24/W for residential projects; the IRR is ~8.2%; the majority of the installations were completed in ’15; the projects are spread over 18 states, w/ no single state comprising >35% of the portfolio; & the avg. FICO score for the residential customers is 744.

 

The Bad: when looking at just the cash equity proceeds from this deal ($227mn) – while we recognize an additional $376mn in cash, ~$346mn of which is tax-equity (“TE”), has already been received, while, technically, TE is available for general corp. purposes, given it’s largely been spent to offset the CAPEX of the systems themselves (meaning, in reality, it is not available), we feel the relevant metric to analyze is the cash equity received, or the cash available for new project investment/debt retirement – adjusting for SCTY’s 5% ownership, a more normalized ?50% mix of SREC’s from CA, and then applying these metrics to SCTY’s existing installed base of 1.67GW (i.e., 1.8GW of cum. deployed GWs – 177MW of MyPower loans [MyPower loans have no tax equity]), adjusted for debt, the Silevo earn out, unrestricted cash, the book value of MyPower, the full renewal value, & a 35% tax rate, we derive a fair value for SCTY’s PowerCo of just $0.71/shr (Ex. 6).

 

The Ugly: $2.71/W in costs (Ex. 7) – $1.38/W in tax equity (Ex. 8) – $0.07/W in rebates/repayments (Ex. 9) = $1.25/W in funding needs; yet cash equity proceeds from JHF were just $1.18/W, meaning SCTY sold at a loss. Caveat emptor.

 

Dark Clouds Ahead? We believe a mild bookings trend borne out of SCTY’s decision to leave NV, & withdraw MyPower, will compel an annual guidance cut when the company reports earnings next week.

* * *

The key here is… for all intents and purposes, SCTY got an investment from John Hancock Financial (“JHF”) – it was not a project sale. SCTY retained ownership but, sold off 95% of their cash flows. In our view, what Consensus appears to have missed in all of this, in addition to the fact that the tax-equity cash flows are not available for immediate redeployment for growth/debt pay down, is that SCTY sold the cash flows, but kept the debt (this is not sustainable). While SCTY could indeed use the proceeds from the sale to reduce their growing debt obligation, they are likely going to use them to grow their installed base. 

 

Stepping back, we ask our readers… would you do this? That is, would you ramp up leverage, in return for growth, at the expense of negative free cash flows? We don’t think so as it is value destructive (no matter what SCTY says), and is being done, we believe, to show investors growth at any cost (and, as this deal shows, it is costing dearly). As this becomes more broadly understood, we expect the shares to come under intense pressure.

A few hours later, they already are under “intense pressure” courtesy of none other than Jim Chanos.

And the full report:

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Following the denial in February that this action is in any way about reducing cash, The ECB has made its decision on the EUR500 Bill:

• *ECB ENDS PRODUCTION AND ISSUANCE OF €500 BANKNOTE
• *ECB SAYS ISSUANCE OF EU500 NOTE TO STOP AROUND THE END OF 2018
• *ECB SAYS OTHER EURO BANKNOTES WILL STAY IN PLACE
• *ECB: EU500 CAN BE EXCHANGED AT CEN BANKS FOR UNLIMITED TIME

And just like that the second highest denominated European bank note in circulation (after the CHF1000 Bill) is dead…

And so now, everyone rushes into the CHF 1000 note.

 

So what, big deal, eliminate it. The people will still have 5, 10, 20, 50, 100 and 200 euro bills right.

As we wrote previously, the answer is not that simple at all. Recall that the €500 note is the second highest currency denomination in G10, after the CHF1,000 note. More importantly, the total value of €500 notes in circulation amounts to €306.8bn and has been rising as shown in this BofA chart:

 

Furthermore, as a share of the value of total euros in circulation, the €500 note is the second-highest, after the €50 note.

 

This is what we said in February:

 

 

In other words, if overnight the €307 billion worth of €500 bills were eliminated, the notional value of the entire amount of European physical currency in circulation would decline by 30% to €700 billion!

 

And there you have it: while it may not be banning all European cash outright, we are confident the ECB would be delighted if one third of it was to start, while pretending to be fighting financial crime, terrorism, corruption and drug dealers. 

 

Of course, what Europe would be truly doing is setting the scene for ever more aggressive NIRP, and by removing the highest denomination bank notes, it would make evading negative that much more difficult and costly (albeit would certainly favor gold).

That's not all: as Bank of America pointed out, abolishing the €500 note may even end up even weakening the European currency:

 

 

… we would expect that abolishing a note that represents almost 30% of the total Euros in circulation would be negative for the currency, keeping everything else constant. The share of the €500 note in the total value of Euros in circulation has been falling since 2009 and this has coincided with a weakening Euro in real effective terms. This is not evidence of causality, but we should not ignore it.

 

If we are right, the Euro will weaken, primarily against the USD and the CHF. The USD is the most liquid currency and we would expect it to capture a large share of the drop in the demand for the Euro as a store of value. However, the CHF could also benefit, having the largest note denomination in G10 economies. Indeed, the CHF1000 note is already very popular, representing more than 60% of the CHF  notes in circulation, unless the SNB follows the example of the ECB and also abolishes the CHF1000 note.

BofA is right, unless of course, in this global race to the bottom where every central bank tit has other central bank tats as a direct response, first the SNB "scraps" the CHF1000 bill, and then the Federal Reserve follows suit and listens to Harvard "scholar" and former Standard Chartered CEO Peter Sands who just last week said the US should ban the $100 note as it would "deter tax evasion, financial crime, terrorism and corruption."

 

Go ahead and cut, then: after all who really needs the Benjamins, right? Well, here's the thing:

As the Treasury chart above shows, $100 bills account for for $1.08 trillion of the $1.38 trillion total in circulation. So should the Fed react to the ECB's "scrapping" of the €500 bill, which accounts for 30% of the value of currency in circulation, then the Fed would respond in kind, by eliminating 78% of all paper currency in circulation by value.

Not a bad way to launch a global ban on paper currency ahead of a global NIRP regime, and all, of course, in the name of fighting "tax evasion, financial crime, terrorism and corruption."

via http://ift.tt/1SOEXcy Tyler Durden

As we detailed recently, in addition to its sub-prime debt crisis, China is dealing with an issue that is just as troubling, if not more so: Porkflation. Due to a drop in global production of pig meat, pork prices in China have been skyrocketing at both the wholesale and retail levels.

Retail prices

And wholesale prices

As we also noted previously, Pork's role in CPI is also being felt (factors heavily into the CPI basket), as China's broad-based CPI is creeping up.

 

Porkflation is a very delicate, and very concerning issue for China. The massive amounts of layoffs that China has experienced as a result of a slowing economy has already lead to some social unrest, and pork prices exploding higher for those unemployed will only add fuel to that simmering fire. Social unrest is something that we've been discussing for quite some time as a critical risk factor in China, something that the mainstream media continues to overlook (primer here). As a reminder, the number of strikes that China has experienced has significantly grown over the years, and a growing social unrest is something that the government does not want to deal with, especially as the economy implodes and needs to be the focus for now.

 

 

As such, Beijing has announced that it will release 3.05m kilograms of frozen pork reserve into the capital's market between May 5 and July 4, in an attempt to lower prices.

The impact on prices may be short lived however, as China may not have the sows to be able to continue the subsidy.

China's total sow stock has fallen…

Evan as pork imports have climbed to record levels, going back to 2008.

With that said, one can understand why China won't be implementing a broad based economic stimulus any time soon that would push inflation even higher (RRR cuts or QE). Instead, in an effort to not completely push the citizenry into panic mode, injecting credit piecemeal into the economy will be the path forward – for now.

via http://ift.tt/1TmsV9B Tyler Durden