SolarCity's Stock Is Down Today but There's Reason to Be Optimistic

A second securitization deal is a reason to like SolarCity today.

Apr 3, 2014 at 4:33PM

SolarCity (NASDAQ:SCTY) has announced its second securitization deal before any competitor enters the market and investors should be happy with the way the company's new financing option.

Securitization has become a way to finance projects beyond their equity financing phase and do so in a cost-effective manner. I'd expect to see more installers like SunPower (NASDAQ:SPWR), NRG Energy, and First Solar (NASDAQ:FSLR) join the fray eventually. It may even be a good option for financing YieldCos, like NRG Yield and SunEdison's (NYSE:SUNE) pending YieldCo.

Scty

SolarCity is packaging cash flows from projects like this one and selling them to investors, which drives long-term value. Source: SolarCity. 

How today's deal impacts SolarCity
First, let's get to the details of today's announcement. SolarCity is financing residential solar systems with a bond offering that's secured by the future cash flow generated from a pool of PV systems already installed. The difference between today's deal and the one in November is the size, interest rate, and maturity date.

 

Size

Interest Rate

Maturity

Securitization No. 1 

$54.4 million

4.8%

December 2026

Securitization No. 2 

$70.2 million

4.59%

April 2022

Source: SolarCity.

You can see that the interest rate is down from the first deal, which is in part because the bonds mature sooner but also because investors are becoming more comfortable with securitization of solar assets. Keep in mind that the 10-year U.S. Treasury yield is slightly higher than it was in November so the dropping rate is significant.

Scty

Source: SolarCity.

The impact on SolarCity is that it will generate more cash flow from the projects it already has under contract. In SolarCity's retained value calculation, management has assumed a discount rate of 6% for its future cash flows and since the rate is below that the net impact is higher retained value for shareholders. The last deal was estimated to add $55 million to $60 million in retained value so it's likely the second securitization will be higher than that.

Scty Installers

A growing number of financing options is making solar more affordable and keeping solar workers busy. Source: SolarCity.

What's next?
Securitization has become a standard business practice for SolarCity and as long as its rates fall below 6% new deals should add to future retained value. What's more important is that the company is gaining credibility with debt investors, which can be used to expand offerings in the future. For example, the 30% investment tax credit is dropping to 10% in 2017 and by then the company may finance new projects by securitizing them. Installers with the lowest-cost financing will be able to offer lower prices and retain more value, which is what drives SolarCity's long-term profit growth.

For competitors, SolarCity is leading the charge and we'll have to see when someone responds. Sunrun and SunPower have discussed using securitization in the future and they may be waiting for SolarCity to chart new territory before jumping in.

I could also see securitization as a way to finance commercial and small utility-scale projects that First Solar and SunEdison are building, although that may be further down the line. As the market for solar gets bigger, it'll be easier to chop up assets and sell investors a diverse set of solar cash flows instead of selling bonds on a single project. Time will tell if that's the case.

Why the drop today?
So, why is SolarCity's stock down today? It could be noise, but management did say it expected the next securitization deal to be around $90 million to $100 million on the last conference call, which was only a few weeks ago. The smaller size of today's deal and shorter duration will generate less retained value long term than investors may have expected.

Expectations aside, I think this is another good step forward for SolarCity and another way the company is locking in low long-term financing, a differentiator in solar. Today should be seen as a positive day for SolarCity, even if the market is pushing the stock in the opposite direction.

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