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

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.

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.



Interest Rate


Securitization No. 1 

$54.4 million


December 2026

Securitization No. 2 

$70.2 million


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.

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.

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.

Three stocks poised to be multibaggers
The one sure way to get wealthy is to invest in a groundbreaking company that goes on to dominate a multibillion-dollar industry. Our analysts have found multibagger stocks like Netflix time and again. And now they think they've done it again with three stock picks that they believe could generate the same type of phenomenal returns. They've revealed these picks in a new free report that you can download instantly by clicking here now.

Read/Post Comments (4) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 03, 2014, at 7:18 PM, drivenx wrote:

    So, why is SolarCity's stock down today? Because this stock is insanely overvalued. Great company, but it needs to correct first.

  • Report this Comment On April 03, 2014, at 9:21 PM, oTeslaManiax wrote:

    Solarcity is a great company. It is a disruptor that changed how the solar business is done and it is a leader that is helping bring America into the next energy era. I think it deserves its respect now. I hope to see more positive things said about this company.

  • Report this Comment On April 03, 2014, at 9:45 PM, ronwiserinvestor wrote:

    FHA already offers a $0 down solar loan with tax deductible interest and PACE $0 down solar financing programs with tax deductible interest are popping up all over the country. Solar leases and PPAs don't offer tax deductible interest.

    Then there's LightStream, non-collateralized solar financing that offers 4.99% interest. All of these programs can be offered by solar dealers that offer pricing that is much lower than the pricing that the solar lease and PPA companies offer.

    So I don't see what good securitization will do for the solar lease and PPA companies when they can't even compete on price or system performance to begin with.

  • Report this Comment On April 04, 2014, at 8:32 AM, oTeslaManiax wrote:

    Solarcity stock deserves to go much much higher. No more manipulative BS trash talk.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2902202, ~/Articles/ArticleHandler.aspx, 9/3/2015 3:16:29 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Travis Hoium

Travis Hoium has been writing for since July 2010 and covers the solar industry, renewable energy, and gaming stocks among other things.

Today's Market

updated Moments ago Sponsored by:
DOW 16,404.45 53.07 0.32%
S&P 500 1,956.04 7.18 0.37%
NASD 4,751.17 1.19 0.02%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 3:01 PM
FSLR $48.43 Up +0.47 +0.98%
First Solar CAPS Rating: ***
SCTY $50.00 Up +0.58 +1.17%
SolarCity CAPS Rating: ****
SPWR $23.77 Up +0.82 +3.57%
SunPower Corporati… CAPS Rating: ****
SUNE $11.94 Up +1.15 +10.61%
SunEdison CAPS Rating: ***