SolarCity Corp. (SCTY) operates in the industry of specialized semiconductors and is primarily involved in the provision of clean energy, i.e. solar energy. The company was established in 2006 and is based in San Mateo, California. SolarCity provides its solar systems to home owners, businesses and industrial clients. It provides rooftop solar systems and related services to its customers along with leases and power purchase agreements. Its revenues are almost uniformly distributed between operating leases and system sales. The company recently completed an asset securitization transaction. This transaction is the first of its kind in the solar industry.
SolarCity has completed the first securitization of distributed solar energy assets. $54.4 million were raised as a result of this transaction. Investors are offered 4.8% interest and the bonds will mature in 2026. The bonds are backed by solar assets, including rooftop solar systems. These systems are basically leased and the customers make monthly payments. The bonds are asset backed in the sense that consumer payments cover for the interest the company has to pay to the investor. The point to note here is that this financing arrangement comes with a great level of safety which is preferred by businesses and investors. This is indicative of the future success of such deals in the solar industry. The funding was obtained through private placements with Credit Suisse acting as a finance structuring agent. The bonds are rated BBB+ by S&P. The company is also planning on selling around $200 million of additional loan notes as early as the second quarter of 2014 according to the CFO, Bob Kelly. Through the process of asset securitization, SolarCity matched lease related assets to bond related liabilities and was able to effectively receive payments of leases, improving the cash flow position of the company.
"This transaction is a breakthrough and will pave the way for others, but its greater significance is the validation of the quality of SolarCity's assets" said Bob Kelly. "The transaction represents a tremendous breakthrough for SolarCity and the distributed generation solar industry" said Steve Viscovich, representing Credit Suisse.
There are certain impacts of this transaction not only for SolarCity but also for the industry.
Cost of Capital
The current issuing of loan notes pools solar contracts from over 5,000 residential and commercial photo-voltaic installations and it carries an interest rate which is almost half of the previous cost of financing for the company. Previously, SolarCity relied on tax equity transactions, which brought capital into the company at interest rates of around 8-9%. The fact that the cost of capital of the company will decrease by these loan issues translates into less pressure on earnings and helps in improving the earnings position.
"We offer fixed price contracts, and by financing them with fixed rate debt, we bring a greater level of predictability to our financing activities," says Kelly.
This is a correct assessment by the CFO of SolarCity. Lease and bond payments are predictable; this allows businesses and investors to manage their financings and income properly. The value placed on the predictability of income streams by investors is one of the reasons this financing arrangement will continue to be successful in future.
The problem with issuance of bonds backed by an unpredictable income stream is that it brings risk to the company due to a lack of flexibility and interest obligations. However, the bonds issued under consideration here are backed by lease payments received from creditworthy customers. Hence, the risk and inflexibility is offset by the predictable income stream from the customer. So, raising finance through asset securitization will not be risky as long as new lease agreements are signed and the bonds are backed by through leases.
Impact On The Industry
Source: GTM research
The solar industry is set to grow in the U.S. in the coming future. Global solar growth is also expected. However, this growth demands an injection of capital in the system to support it. Currently, the financing options in the solar industry entail high costs of capital. With the introduction of asset securitization, the industry has been exposed to a broader pool of investors to finance future growth. This will provide access to the additional capital necessary to sustain the growth of the industry.
Asset backed securitization is less risky for the investors and the required return is also low as compared to that of equity investors; making securitization a low cost option for solar companies. In simple terms, the long term cost of capital of the industry will fall down as a result of issuing more asset backed loan notes.
Liquidity will also be enhanced because of this financing structure because the solar companies will able to effectively recover the cost of their projects from the loan note investor.
Overall, the additional capital raised will accelerate growth, enable geo diversity and help the industry to standardize systems and processes.
Asset backed securitization is good news for the solar industry because of its potential to raise additional capital, decrease the cost of capital and enhancing liquidity of the players in the industry. Companies like SolarCity and SunPower (SPWR) will benefit from this development because of their lease offering structure which is compatible for Asset based securitization. First Solar (FSLR) will also follow in the footsteps of SolarCity. SolarCity's current offering will play an important role in the growth of the company itself and is a milestone in shaping the financing structure of the industry.