SolarCity's (NASDAQ:SCTY) sixth securitization, SolarCity LMC Series V LLC (Series 2016-1), is its latest Asset Backed Loan offering. While many of the details about the securitization have been in the public domain, we have withheld writing about this in anticipation of a SEC filing. The SEC filings tend to give more insight into sourcing costs and discount rates, which tend to reveal the true cost of the ABS. SolarCity customarily files its securitization details with the SEC with significant additional detail but there was no such disclosure this time.
Even without this sourcing cost and discount rate data, the ABS offering demonstrates that the Company's business model is increasingly underwater.
Here are the details of the ABS offering:
Proceeds from the securitization were $49.6M. The size of the offering was expected to be $57.5M going by the presale offering ($52.15M Class A plus $5.3M Class B). These assets appear to be sourced in 2014 and have an average FICO score of 750 Effective Yield on the offering is 6.25%
While we suspect the ABS could have been more expensive than revealed, we will stick with what we know. In effect, the Company is paying 6.25% for an over-collateralized 5-year asset-backed loan. This is a big increase from the last two ABSs.
Now let's consider two other debt data points. On February 26th and March 21st, the Company revealed two more tranches of its "Solar Bond Program" as detailed below:
$90M of the $100M in the March 21st tranche came from Space-X - another Elon Musk related entity. While there is nothing nefarious about this, we note that this transaction appears to be a rollover of last year's Space-X Solar Bond purchase. However, the last year bond was sold at a 2% rate. SolarCity had to pay 2.2% more for a similar Solar Bond this year!
What is unmistakable is that SolarCity is increasingly funding its long-term assets with short-term loans and it is also doing so at ever-increasing short-term debt costs.
SolarCity did yet another short-term debt raise recently. On 3/31, the Company entered into a debt facility with Credit Suisse. According to the Company press release, "SolarCity Corporation today announced it has closed a new $150 million non-recourse financing facility with Credit Suisse…"
However, the related SEC filing states that "All obligations under the Credit Facility are secured, subject to certain exceptions, by substantially all of Borrower's assets, including first-priority liens on the solar systems owned by Borrower, the revenues from Lessee and Borrower's bank accounts into which such revenues are deposited, and certain related collateral. The obligations under the Credit Facility are not secured by any lien on the solar systems."
It appears that either the PR or the SEC filing or both are in error. Recourse or non-recourse? Which is it?
The SEC filing is unclear on the interest rate on this short-term debt maturing on December 31, 2017. It stated that "Borrowings under the Credit Facility bear interest at a rate per annum equal to cost of funds plus an applicable margin of 3.25%." If we assume a 1-year LIBOR index, we are looking at cost of one year secured debt at about 4.5%.
In this context, it is mind boggling that the Company insists on using a 6% discount rate for its 30-year revenue streams with 5-year ABSs pricing at 6.25% and 1-year senior debt pricing at 4.4% or 4.5%.
Going back to the ABS, SolarCity notes that it received $3.13 of financing per watt inclusive of tax equity. SolarCity further notes that this amount is well above the $2.71 per watt installation costs, which the company achieved in the fourth quarter of 2015. Since the Company is comparing cash flows from 2014 assets with costs of Q4 2015 assets, the Company's statement here is clearly not that of profitability but cash flow. The implicit argument here is that the Company can sustain its operations because of the resulting positive cash flow. While this argument might appear to make sense on a short-term cash flow basis, there are several flaws with this line of thinking:
Even assuming the numbers are valid, considering the Company's growth rate, the securitization of 2014 assets can only finance a fraction of the anticipated 2016 forecast. In other words, for the cash flow math to work, the Company has to raise more cash or the Company's growth will be stunted. SolarCity's noted cost of $2.71 per watt is understated due to several assumptions that the Company makes in calculating this metric.
The Company uses illusory backlog for a divisor for some calculations, and does not include the costs associated with stock-based compensation, M&A, or corporate interest expenses. In essence, the stated cost is woefully short of what it takes to sustain the Company on an ongoing basis. With the Company's mix becoming increasingly commercial, it is unclear how the securitization may work for commercial assets.
We are skeptical that SolarCity can effectively securitize commercial assets. With the Company's mix coming increasingly from Mexico, it is even more uncertain how those assets will be monetized. The FICO scores of the customers are declining with the implication being that this will more adversely affect the Company's borrowing and discount rates. With the market moving slowly but surely discounting asset life past the initial 20-year term, we believe tax equity will also start becoming more expensive for the Company.
With mounting evidence that the business plan for the company is busted, the Company is playing the dangerous game of financing long-term assets with short-term debt. With residential solar trends for lease/PPA companies unmistakably negative, the Company is courting a disaster.
The Company cannot afford to float longer-term instruments as that would immediately kill the Company's retained value and value generation fantasies - and thus its valuation. That leaves equity raise as the only viable option to mitigate risk.
The Company, similar to SunEdison (NYSE:SUNE), appears to be on a path to spectacular implosion. Any run up in the stock price is a lucrative shorting opportunity. However, the stock appears to be in a short squeeze though we have likely reached the end of a squeeze. High-risk investors can consider naked calls.
Our View: Sell/Short.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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