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SolarCity Corp Shares Sink: Is This a Solar Eclipse or Just a Cloudy Day?

By Travis Hoium - Oct 15, 2014 at 2:56PM

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Is this meaningful or just another movement?

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of SolarCity (SCTY.DL) have crashed once again today, falling near 7% in early trading. This continues a long, hard fall for SolarCity shares, driven by a sell-off in both energy stocks and the broader market. 

SCTY Chart

SCTY data by YCharts

So what: The news out today from SolarCity was actually positive, despite the market's reaction. The company announced the first ever offering of solar bonds for sale to the public. Until now, solar bonds were only available to wealthy or institutional investors. Up to $200 million of bonds will be offered and have yields ranging from 2% for one-year bonds to 4% for seven-year bonds.

The bonds aren't actually an investment in any solar projects themselves, instead they're debt issued to SolarCity. The automatic shelf registration statement says, "you are not investing directly in specific solar energy systems when you invest in Solar Bonds. You are investing in senior unsecured corporate debt issued by SolarCity."

New solar bonds will help fund solar projects like this one. Image source: SolarCity.

The intention of the bonds from SolarCity's perspective is to increase its financing capacity and bring in new retail customers as well. In discussions I've had with SolarCity in the past year it's been clear that they're intending solar bonds to make investors more comfortable with solar, make it easier for SolarCity to sell them a solar installation, and build the brand out as well.

Now what: The big question here is whether or not unsecured solar bonds are a good deal for investors and if it makes SolarCity more valuable. The answer is up in the air, but I have my doubts.

First, for retail investors looking at solar bonds I think SolarCity is giving them a raw deal. A recently completed securitization from SolarCity, which is secured by lease payments from customers, yielded 4.03% for the first tranche and 5.45% for the second tranche. A 5-year convertible debt offering, which comes with the option to convert to shares if the stock goes up, yielded 1.625% just last month. A 4% rate for seven years is extremely low for unsecured debt in a high-risk company. Investors would be better off buying the stock if they like SolarCity rather than buying these bonds. 

But from SolarCity's perspective this is a great deal if they can sell $200 million worth of these bonds. They're offering a lower yield than they can get for a secured product and don't have to offer any collateral to investors.

Time will tell if there's enough demand for this product for SolarCity to get the funding it desires. If it can, it's a new financing option with a low yield. That should be good for SolarCity even if I don't think it's a great deal for bond investors.

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