SunPower (NASDAQ:SPWR), one of North America's largest solar companies, intends to issue bonds backed by solar assets later this year, according to a report by Reuters.  We believe that the bonds, which will be backed by solar leases, could potentially allow the company to tap into a cheaper and potentially larger pool of capital, allowing it to grow its residential solar leasing business. In this note, we take a look at some of the recent trends in the solar project financing space and why we believe asset-backed bonds could prove particularly attractive for SunPower.
Trefis has a $29 price estimate for SunPower, which is about 10% below the current market price.
Growing Need To Tap Into New Funding Sources
Project financing has proven to be a significant obstacle for solar companies in the past. Developers have largely relied on complex tax equity investments or expensive bank debt to fund projects, as they have had difficulty tapping into cheaper sources of capital due to the lack of long-term data on solar power, and also due to the perception of solar as being risky and unproven. However, the decline in solar systems prices of late, as well as improvements in panel technology, have brought about a greater acceptance of solar power and have made solar assets increasingly attractive.
Solar companies have been seeking to fund projects through new avenues given that the federal solar investment tax credit, which provides a 30% tax credit to solar project developers and has traditionally helped to attract capital from tax equity investors, is set to drop to about 10% by the end of 2016.  Some of the alternative funding sources include debt securities, such as asset-backed securities (NYSE:ABS) that pool together power purchase agreements from utility scale plants or residential solar leases, and pass on the payments from these assets to debt investors (see Securitization And MLPs Can Help Solar Developers Cut Funding Costs).
Solar City's Offer A Validation Of Market For Solar Lease-Backed Bonds
SunPower's decision to launch its first tranche of solar bonds comes shortly after SolarCity, a solar system installer, successfully closed a $54 million private placement of bonds backed by residential and commercial solar power contracts in November 2013. SolarCity's offer served as a validation of solar-backed assets in general, receiving a BBB+ credit rating (low investment grade) from Standard & Poor's. The issue has a scheduled maturity date of December 2026 and was priced to yield about 4.8%. While the company aims to issue another $200 million of additional notes, it also intends to open up its solar securities to retail investors this year through an online system that would allow retail investors to lend money for its solar projects. 
SunPower Could Issue Solar Securities To Grow Its Residential Business
SunPower's residential leasing business has been growing rapidly, with over 20,000 leases signed to date. However, it still trails Solar City, which has over four times as many customers. The company had indicated in the past that funding was one of the key bottlenecks holding back the growth of the business. SunPower's residential solar leases are likely to be ideal assets for securitization given that they have long durations and offer steady cash flows in the form of monthly lease payments. Raising funding through asset-backed bonds should allow the company to reduce the cost of funding its leases and would also potentially allow it to tap into a larger pool of investors who want exposure to the solar sector.
SunPower could also have some advantages over other developers who choose to issue asset-backed securities. SunPower's solar panels and systems are also known to have a lower performance degradation over time, meaning that they will produce more electricity over the life of a lease compared to other panels. This is likely to be a positive attribute for credit ratings and yields. Additionally, interest rates on SunPower's bonds could be lower given that it is backed by Total SA (NYSE:TOT), one of Europe's largest oil companies. Total owns a 66% stake in SunPower. The risk of default could also potentially be lower if securities are backed solely by residential leases, since residential users are likely to pay their electricity bills (lease payments in this case) even in the event of an economic downturn.
Disclosure: No positions.