Sun Cable is a proposed $35 billion solar energy project in the Northern Territory of Australia. The project aims to build the world’s largest solar farm and a 10 GW-hour energy storage facility to supply electricity to Singapore and Indonesia via a 4,200 km undersea cable.
In July 2021, Sun Cable secured environmental approval from the Northern Territory government, which was a significant milestone for the project. The approval allows the project to proceed with further development and construction.
For the most part, the project has experienced a steady stream of funding – Sun Cable secured $210 million in a series B raise in March 2022. However, missed development milestones restricted Sun Cable’s access to a portion of the Series B funding which put the project under significant financial strain in late 2022.
Battle of the Energy Moguls
In December 2022, efforts to secure additional funding to keep the project on foot met significant headwinds due to what the company considered an “absence of alignment” among shareholders concerning the direction of the project.
In particular, billionaire energy moguls Mike Cannon-Brookes and Andrew Forrest, Sun Cable’s major shareholders, clashed over increasingly divergent visions for the future of Sun Cable. Breaking from the project’s initial design, it appears Forrest wants to scrap the Singapore link aspect of the project in favour of delivering the energy generated from the solar farm to Darwin to power green hydrogen and ammonia production to meet the energy needs of Southeast Asia.
Citing conversations with authorities in Singapore, Forrest argues that the demand in Southeast Asia is not for a transnational renewable electric supply but for green hydrogen and green ammonia, both of which can be shipped overseas from the Northern Territory.
For his part, Cannon-Brookes argues that Sun Cable should stick to its original plan of becoming the world’s largest solar facility cabling solar generated electricity to Singapore and Indonesia. Cannon-Brookes believes that the projected estimates for the project as a solar provider make solar a more certain bet – the project is intended to supply 15 per cent of Singapore’s electricity from a 12,000-hectare solar farm with a capacity of as much as 20 gigawatts.
With the project’s largest investors at a crossroad and additional shareholder funding stymied, Sun Cable appointed voluntary administrators in early January 2023 in an effort to unlock access to further capital and pave a path forward for the world’s most ambitious solar project to be restructured.
Where are we now?
Sun Cable remains in administration with neither Forrest nor Cannon-Brookes letting up on their efforts to reclaim the company – each pursuing different strategies to gain a strategic advantage over the other. Whilst in administration, however, the cash burn continues and arguably the direction of the business remains unclear. It is therefore critical that a new owner is found to ensure the viability of the project – in whatever iteration – as soon as possible.
FTI Consulting and their financial advisors, MA Moelis, have sought expressions of interest for the project and we expect this will take the form of a deed of company arrangement (DOCA). It is likely that each of Forrest and Cannon-Brookes will put forward competing proposals, and there may also be third party offers. A DOCA, if approved, will allow the company to be restructured by compromising pre-appointment debts and allowing the transfer of all of the Sun Cable shares (which are now presumably worthless) to the successful DOCA proponent. This process of transfer is undertaken pursuant to section 444GA of the Corporations Act 2001 (Cth) (the Act) through a court application. Critically, if no unfair prejudice is shown (i.e. no value for equity in a liquidation) then the transfer of shares can occur without the consent of shareholders.
Any successful DOCA proponent will look to acquire all of the shares for complete control of the company, and we anticipate a critical effectuation step will be the court application and accompanying independent expert report which will show what the outcome for creditors would be in a liquidation of Sun Cable as a counter-factual. We anticipate this will show the value ‘breaks in the debt’ or that there is no value for equity, and that there would be no unfair prejudice arising from the transfer of shares. This counter-factual analysis will also determine in large part what the return to creditors under the DOCA would need to be in order to provide a better outcome than a liquidation – this is likely to be a cents in the dollar return for pre-appointment debts, continuation of employment for employees and potentially rolling forward any longer term debt (or refinancing).
Cannon Brookes’ Grok Ventures (Grok) secured what would typically be perceived as an initial advantage over Forrest’s entity, Squadron Energy (Squadron), by providing the administrators with $65 million in interim funding required to ensure the business could continue to be run during the administration period.
Absent this funding, the administrators would likely have needed to stand down staff and halt further development of the project. This funding was also provided at zero interest for six months which is a compelling commercial reason for the administrators to accept the offer. While a Grok spokesperson revealed the funding would “allow the company to continue realising its strategy and reach key project milestones”, the decision is also in part tactical – it gives Grok an edge over the other bidders.
In cases where administration funding is provided, the funding provider can sometimes gain an advantage by attaching conditions to the funding, such as exclusivity in a subsequent sale process. Interestingly in this case, it is understood that the funding does not afford Grok any special advantages.
However, the decision to fund the administration may still represent a leg-up for Grok heading into the Sun Cable sale process. Hamilton Locke Restructuring and Insolvency Partner, Nick Edwards explains, “Any other bidder looking to acquire Sun Cable, be it Forest or a third party, will need to pay out the interim funding in full as part of their deal. This funding is a cost of the administration itself and will need to be dealt with – this gives Canon-Brookes an immediate advantage as he need not deal with the funding upfront and can instead roll it into longer term debt or structure it as part of his DOCA contribution.”
Despite losing out on funding the administration, Squadron is understood to be acquiring the pre-appointment debts of a number of Sun Cable’s other creditors. This is clearly being undertaken to assist Squadron with the voting dynamics at the second meeting of creditors. At that meeting, creditors are given the opportunity to decide the company’s future via resolution – typically there is only one proposal put to creditors to consider as an alternative to liquidation, however, given the personalities involved, there is a world where both proposals are put to the creditors. Which proposal will be accepted – Grok’s or Squadron’s? Who will provide the best return for creditors? Importantly, the resolution which will determine the future of Sun Cable will only pass if it is approved by more than 50% of the creditors in number and more than 50% of creditors in value of pre-appointment debt (noting the funding provided by Grok to the administrators cannot be counted). Equity does not have a say. As Edwards notes,
“Controlling the debt stack may allow Squadron (or indeed anyone) to determine the outcome of Sun Cable. In administrations of this nature, the employees generally account for the numbers side of the equation as each individual employee has one vote, so a key focus will be on controlling the majority of creditors in value. Ultimately, it will come down to who provides the best return to creditors and the best proposal for the ongoing viability of the business – critically the DOCA proposal recommended by the administrators will also have a ‘leg up’”.
If the creditors’ vote is split, the Chair of the meeting (one of the administrators) can exercise a casting vote. Typically, this is used to vote in favour of the DOCA proposal which they recommended. The administrators will recommend the proposal they believe provides the best return to creditors, that provides the best opportunity for the business to continue as a going concern and the proposal that has minimal conditionality.
Whilst controlling the creditor vote would generally provide a potential acquirer with an advantage, administrators also have a power of sale which does not require creditor approval. This gives other buyers an option to structure a transaction around an otherwise controlling creditor.
Is there a Hail Mary on the horizon?
The big question is whether there is a third or fourth bidder waiting in the wings. We understand that non-binding indicative bids were due to the administrator and MA Moelis on 6 March 2023 with binding proposals to be submitted by the end of April 2023.
While the sun is setting on the deadline for shortlisted parties to submit a binding proposal, there remains an opportunity for an outside party to make a ‘Hail Mary’ play to overtake the front running bids before a proposal is selected. Hamilton Locke Corporate Partner, Guy Sanderson, set out the fundamental prerequisites of a potential third party bidder:
“At this point in the process, it will be a long shot for a bidder to come from behind and overtake Forrest and Cannon-Brookes. However, a bold play could put a third party in contention. That party would have to do three main things:
- Overcome the current advantages held by Grok (in the form of the $65 million priority funding to the administrator) and Squadron (in the form of the other creditors’ debts it has acquired) – this may well be achievable with careful transaction structuring;
- Provide a proposal that has very limited conditionality. A FIRB approval condition, for example, that adds time and uncertainty would make the proposal less attractive; and
- Provide an offer with enough funding to deliver a better outcome for creditors than what would result from acceptance of either the Squadron or Grok offers. One way to achieve this would be to pay out the Grok funding upon execution of the DOCA and pay a substantial non-refundable deposit that could be used to cover administration costs for the completion period and effectively take the administration off-risk. It is likely that any successful bid would also need to provide a new funding line, if required, to the administrators for the completion period.”
According to Hamilton Locke New Energy Partner, Matt Baumgurtel, this final point is where a third-party bidder may be able to pull ahead as it allows the party to address the subjective elements of bid:
“Even if a third bidder can provide the funds required and meet that limited conditionality, they still need to distinguish themselves and answer the question: why pick me? I think a strong distinguishing factor would be address the national security concerns around an energy project of this magnitude.
A third-party bid could address the sovereignty and security risks posed by the Sun Cable development, providing methods to reduce the risks created by the project’s exposure to foreign interference or attack. This in turn could boost the government’s tacit support of the project – a form of conditional support that can make a bid more attractive to both creditors and the administrators.
Ultimately, it will be a decision for the creditors – under the guidance of the administrators – and any party who wishes to enter the fray needs to think tactically about the dynamics of the present situation and the future of the project.”
The deadline for binding offers is the end of April with the sale process to be completed by May. Will it be Cannon-Brookes, the engineering marvel, Andrew Forrest with the global hydrogen play or is there a third bidder, with a risk appetite large enough, who will secure the bid to take on the world’s most ambitious solar project?
Involved in the development, financing, construction and operation of new energy projects, Hamilton Locke is uniquely positioned to provide professional insight into the opportunities and challenges facing the world’s efforts to create a carbon free future.
Matt Baumgurtel leads the New Energy team at Hamilton Locke.
Nicholas Edwards leads the Restructuring and Insolvency team at Hamilton Locke.
Guy Sanderson is a Partner in the Corporate team at Hamilton Locke.