There are a few key milestones in the development of the solar industry that will be remembered for years to come. One of those happened this morning when SolarCity (NASDAQ:SCTY) announced a proposed solar securitization.
The deal is a $53.425 million private placement of notes that will mature in December 2026. The notes will pool solar leases owned by SolarCity and pay investors based on cash flows from those leases. Important terms like borrowing costs haven't been released but in coming days and weeks we'll learn just what investors are demanding from solar securitization.
A new funding source for solar
The importance of this step for installers like SolarCity, SunPower (NASDAQ:SPWR), and First Solar (NASDAQ:FSLR) can't be understated. Long term, securitization will help lower borrowing costs and provide a funding source for residential, commercial, and utility scale projects, which will open up billions of dollars in opportunities for the industry. It will also open up alternative ownership structures, potentially allowing these companies to own attractive projects and securitize cash flows instead of selling projects entirely.
A few years ago, SunPower sold the first solar project bonds, opening up new financing for utility scale projects. Those have been successful in the market and securitization will be a way to open up financing options for smaller residential and commercial projects as well.
A boost at the right time for solar
This comes just when solar manufacturers are starting to see their financial conditions improve, even turning a profit in some cases. First Solar and SunPower reported strong profits last week and the rest of the industry looks to be strong as well.
Canadian Solar (NASDAQ:CSIQ) said this morning that shipments will be between 460 MW and 480 MW and gross margin would be 18%-20% on strong demand for panels and power plants. The company previously expected margins of 10%-12% on between 410 MW and 430 MW of module shipments. Canadian Solar is building a significant downstream business and securitization opens up a new option for this Chinese supplier as well. Along with the three U.S. companies, Canadian solar can benefit from securitization as well.
Profits mean more money for expansion, which is only possible if the financing to build projects is available. Securitization is one of the last keys to the puzzle.
Foolish bottom line
The $54.4 million offering from SolarCity isn't huge, but it's a toe into the water of securitization. Don't be surprised to see other downstream companies to do the same over the next year, especially as investors become more comfortable with the terms of securitization.
For SolarCity, this will also allow the company to create more upfront cash flow rather than financing projects after equity financing runs out. We'll get more information on how this will impact the balance sheet and income statement on the company's conference call on Wednesday, but at the very least it's an incremental positive for SolarCity and the rest of the industry.
Fool contributor Travis Hoium manages an account that owns shares of SunPower and personally owns shares and has the following options: long January 2015 $5 calls on SunPower, long January 2015 $7 calls on SunPower, long January 2015 $15 calls on SunPower, long January 2015 $25 calls on SunPower, and long January 2015 $40 calls on SunPower. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.