Tesla and SolarCity: Similar Green Credentials, Very Different Credit Ratings

Tesla (NASDAQ: TSLA  ) is known for making big news announcements, but it was S&P that made the headlines recently when it gave Tesla bonds a junk rating. If you're itching to get some "green" income, don't bother with the electric car maker; instead, keep a close eye on SolarCity's (NASDAQ: SCTY  ) debt plans.

Tesla is a big-name stock
There's no question that Tesla and CEO Elon Musk are masters of publicity. The most recent example of this is the company's plans to build a gigantic battery factory. It's an interesting idea that will require the cooperation of multiple industry participants and billions of dollars. It might not work, but that doesn't matter because it's got Tesla in the news.

That's not to suggest that Tesla shouldn't be in the news. Since turning a quarterly profit in early 2013, the company's shares have skyrocketed. The only thing is that Tesla has lost money every quarter since, so it's really the hope of future profits that's driving its stock. The funny thing is that S&P doesn't share that enthusiasm when it comes to Tesla's debt.

TSLA Chart

TSLA data by YCharts

S&P sums up the problems pretty well: Tesla lacks the scale of its auto peers and has a narrow focus on a niche product. Debt analysts Nishit Madlani, Dan Picciotto, and Joseph Lin concluded in their report that "there is considerable uncertainty in Tesla's long-term prospects." Even if you think the future will be bright, it's hard to argue with the uncertainty tag based on Tesla's financial results.

If you are looking for "green" income, Tesla bonds are a potentially risky way to get it. It's a good thing that Tesla isn't your only option.

Rooftop solar bonds
Sure, bonds backed by an electric car pioneer have serious "green" street cred, but so do bonds backed by rooftop solar pioneer SolarCity. SolarCity's CFO Bob Kelly highlighted a key difference in the company's first quarter conference call when he noted that SolarCity bonds, "were rated BBB plus by Standard & Poor's." That's investment grade.

(Source: Lucas Braun, via Wikimedia Commons)

The other big difference is what's backing the bonds. Tesla's bonds are backed by Tesla and its ability to pay back its debts. SolarCity's bonds are backed by collections of installed rooftop solar systems. Although you can't exactly take ownership of the systems, they live apart from SolarCity and would survive SolarCity should the company fail.

Since SolarCity is just as unprofitable as Tesla, that's a good thing. In fact, SolarCity has lost money in four of the past five quarters as it spends to grow its portfolio of assets. That spending is extra important for SolarCity because solar adoption is heavily reliant on government support. SolarCity needs to build its scale as fast as it can while Uncle Sam is still lending a helping hand, as that's something that won't last forever. Arizona, for example, is already starting to pull back on that front.

The best part of SolarCity's debt plan, however, is that the company is getting set to give individual investors direct access to rooftop solar-backed debt. It's important to note that this will be very different from crowdfunding in which investors come together to back specific projects. SolarCity will pool together solar assets and offer up a fixed-income product. That provides an important level of diversification. Since the company's current solar-backed debt is highly rated, there's no reason to expect the new product, aimed at smaller investors, to be rating anything less than investment grade.

"Green" bonds
The idea of investing in "green" companies like Tesla and SolarCity is nice, but it is certainly not for the risk averse. Bonds are arguably safer, but not much if they are backed by money-losing companies. That's why Tesla's "green" bonds are less desirable than SolarCity's bonds, which are backed by its installed rooftop solar systems. If you are looking for "green" debt, keep a close eye on SolarCity and stay away from the "junk" offered by Tesla.

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  • Report this Comment On June 11, 2014, at 12:48 PM, emarshall12 wrote:

    Thank you for the post. I think it is a great idea to use solar heating for a pool. It is good for the environment, which is something I value. How much does it cost to get the panels installed?

    Emily Marshall | http://poolsolarwa.com/solar-heating/

  • Report this Comment On June 11, 2014, at 2:08 PM, dlwatib wrote:

    Of course there is one important difference between the Tesla bonds and the SolarCity bonds that somehow got missed in the article. Tesla bonds are convertible, which means that they could be much more valuable as Tesla shares than as income. That's their real allure.

  • Report this Comment On June 11, 2014, at 2:48 PM, ronwiserinvestor wrote:

    @Emily It's cheaper that owning a pool and a solar pool heater. And it will generate income for the next 30 years. How long does your pool heaters last.

  • Report this Comment On June 11, 2014, at 5:07 PM, JackB125 wrote:

    You mentioned that Tesla is not currently profitable multiple times in this article. I guess if they stopped spending on R&D and capex expansions you would see that as positive? They'd certainly be profitable then. But Tesla would be squandering its growth when demand outstrips supply and they are doing everything they reasonable can do to expand their lineup. As a long-term Tesla investor, I would be furious if Tesla were to sacrifice this growth opportunity in the name of short term profits. Yes, as the company & the EV industry matures, Tesla will certainly need to be profitable. But to cut back on expansion spending at this time would be terribly shortsighted.

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