Falcon 9 getting ready for takeoff in December. Image source: SpaceX.
In Elon Musk's wild web of businesses, there's never an action without an equal (although not necessarily opposite) reaction somewhere else in the world. This morning, when SpaceX's Falcon 9 rocket and the $195 million Facebook (FB 0.80%) satellite aboard it went up in flames, it may not have seemed like a blaze that could bring SolarCity (SCTY +0.00%) or Tesla Motors (TSLA +0.78%) down with it. But it could. And here's how.
SolarCity's sugar daddy
You might know that SolarCity actually owns most of the hundreds of thousands of rooftop solar systems it has built. As a result, it needs billions of dollars in funding each year. So the flow of debt coming into the company is vital to its very survival.
What people might not know is that SolarCity is getting a lot of funding from SpaceX and Elon Musk and family. They're buying hundreds of millions of dollars in solar bonds that almost no one else is interested in. Below is a table that shows the large purchases of solar bonds by SpaceX, Elon Musk, SolarCity CEO Lyndon Rive, and CTO Pater Rive over the past year-and-a-half.
|
Time Frame |
Bought by SpaceX/Musk and Family |
Counterparty |
|---|---|---|
|
March 2015 -- June 2015 |
$165 million |
SpaceX |
|
March 2016 |
$90 million |
SpaceX |
|
June 2016 |
$75 million |
SpaceX |
|
August 2016 |
$100 million |
Elon Musk, Lyndon Rive, Peter Rive |
Source: SolarCity SEC filings.
You can see that SpaceX has bought $330 million of bonds in total, although some of those bonds have matured and been reinvested. But if we just look at the $217.8 million of solar bonds outstanding on June 30, 2016, most of the money was owed to one company: SpaceX.
The money from SpaceX is vital for SolarCity because the company is burning through cash like crazy right now. It went through $216 million in Q2 2016, and ended the quarter with just $146 million in cash on hand.
SpaceX isn't public, so we don't know its current cash position. But Elon Musk said it had about $1 billion in cash on hand in the spring of 2015, which is why it had enough to buy one-year solar bonds from SolarCity in the first place. But with the last funding round of $1 billion coming in January of 2015, it's likely it has far less cash than that today. And now it has one less rocket.
If SpaceX isn't able to continue buying solar bonds from SolarCity because of its own cash needs, there will be a funding hole for the company. And with 85% of the current solar bonds maturing in the next year, the money will have to come from somewhere. This month, Elon Musk saved the day, but that may not happen forever.
The Musk lines of credit may be drying up
The $100 million in funding from Elon Musk and the Rive brothers last month came as SolarCity was desperate for cash. And the interest rate they got on debt was higher than SolarCity has ever given for solar bonds.
But we need to keep in mind that Elon Musk is not a cash-rich billionaire, and only has so much capacity to keep the company afloat. In fact, he has taken out $475 million of personal lines of credit, backed by both SolarCity and Tesla Motors stock. He's already highly leveraged, and doesn't have the money to keep SolarCity's massive balance sheet afloat by himself.
The cash crunch for SolarCity is real
The worst thing that could happen to any solar company is a financing crunch. The company's leasing model requires continuous financing from a variety of investors, and we're seeing those investors either demand higher interest rates, or avoid the company altogether, especially with the Tesla merger on the horizon.
Two backstops -- Elon Musk and SpaceX -- may be hitting their financial limits in rescuing the solar company. And SpaceX now needs to spend millions replacing the Falcon 9 rocket that blew up.
This could put SolarCity in a real bind as it goes forward. And investors need to seriously think about what SolarCity's finances would look like if the funding from the Elon Musk web of companies dries up. Because it might.
