SolarCity (SCTY +0.00%) made a long anticipated breakthrough last night, pricing the first securitized solar offering. The $54.4 million offering will be backed by cash flow from a pool of PV systems and pay investors 4.8% annually, maturing on December 21, 2026.
Solar bonds backed by projects have been sold but this is the first pooled securitization of solar systems and opens up a new financing option for SolarCity as well as others in the industry. SunPower (SPWR +0.00%) has discussed securitization in the past and even First Solar (FSLR 0.80%) may see this as an attractive option as it moves into new markets.
Opening a world of financing
Securitizing solar system payments is a lot like securitizing mortgages, something the banking industry has done with great success. It helps lower the cost of capital and with systems like residential and commercial solar it will pass off some of the cost of the asset while keeping much of the upside. For example, SolarCity doesn't give up potential future cash flow from a lease renewal or performance above the contracted payments.
SolarCity installations in California. Image courtesy SolarCity.
For bond investors, they get a predictable cash flow and don't have the risk that a loan will be paid off early. In mortgages, this is a troublesome risk because if interest rates fall homeowners pay off loans more quickly by refinancing or paying extra each month. On the other hand, if they rise there's little incentive to pay off your mortgage early and investors are stuck with a below market interest rate. In both cases, the option of early payoff is works against bond investors.
In solar, a system is contracted for 20 years and there's little risk the cash flows will change. A small percentage of homeowners may uninstall panels in the case of a home sale, but this isn't a big risk. So, the solar industry can offer an attractive bond with an attractive asset backing it.
What this means for solar's biggest players
Today, SolarCity, SunPower, Sunrun, and Clean Power Finance use equity financing to pay for systems early in their life cycle because of federal tax benefits. But once equity financing is paid off they need a new financing option. Securitization is one of the more attractive options because it's backed by solar assets and doesn't pose a risk the actual company. SolarCity said the notes "will not be insured or guaranteed by SolarCity Corporation or any other affiliate thereof".
I'd expect SunPower to begin using securitization in the next few years to finance residential and commercial projects as well. First Solar has preferred selling solar projects backed by debt, but another option that may keep the solar system within First Solar may be an attractive option.
As companies push systems down to new entities these debt options will lower costs and open up new investing options for investors.
Foolish bottom line
Securitization is another solid step forward for the solar industry and will help pay for its potential growth. Before long, companies other than SolarCity will begin using this financing option, which will help lower a solar system's cost, something everyone in the industry can cheer.
