SolarCity Turns to Bond Market to Fill Tax-Credit Funding Void

SolarCity Corp., the biggest U.S. residential solar installer, is turning to the bond market as the industry weans itself off a tax credit that’s staged to wind down.

The bonds, backed by solar-panel leases and installment financing receivables, would be structured as an asset-backed security, the company said. The securities are expected for the first time to include a tax-equity component, possibly with investment-grade ratings, Chief Financial Officer Brad Buss said during an earnings call earlier this month, with the goal of speeding up the company’s debt financing.

U.S. solar companies are seeking a more permanent and cheaper source of capital before an investment tax credit to the industry declines from 30 percent to 10 percent after next year.

If the deal is successful, there could be “a surge” of solar ABS offerings “to lock in low interest rates,” said project finance attorney Buz Barclay, managing partner at Rimon PC in New York.

San Mateo, California-based SolarCity sold the industry’s first-ever solar asset-back bond, which in 2013 was hailed as a game-changer. Other companies said they would follow suit with similar offerings, but no other U.S. solar company has sold a rated deal so far.

Retail Demand

Billionaire entrepreneur Elon Musk is chairman of SolarCity and its biggest shareholder, with about a 21 percent stake, according to data compiled by Bloomberg. Musk is also chairman and Chief Executive Officer of Tesla Motors Inc.

Standard & Poor’s assigned SolarCity’s third issuance, a $201 million deal backed by 15,915 panel systems, BBB+ credit ratings last year.

“Trust me, we’d love to be going quicker,” Buss said during the earnings call, adding “we’re very close to a new facility” without giving a timetable. He promised a more frequent issuance schedule once the hybrid deal gets out of the gates.

One alternative source of capital meanwhile has been to tap into demand from individual investors. SolarCity, for example, has raised in four months one-third of all its asset-backed debt outstanding, $313 million, through an unsecured retail product started this year. Individuals can buy “solar-bonds” for as low as $1,000 on the company’s website.

In January, potential issuers received encouragement from Moody’s Investors Service, which described a market for the bonds as distinct and emerging. The biggest driver behind the boom for residential rooftop systems has been a continued drop in cost, Moody’s said.

Default Risk

Moody’s also cited the short performance histories and track records of solar companies as a difficulty in assessing risks in the asset class. Such concern has delayed the quarterly bond program Buss has sought to achieve.

“Performance risk is allocated to development companies that are not themselves investment grade, and default risk is not all that well quantified,” said Barclay.

One of the most difficult obstacles has been figuring out how to standardize and guarantee cash-stream payments to lenders, bondholders and tax-equity investors, while preserving the cost-efficiency of an asset-backed product.

Recent progress at the ratings companies means more breakthroughs may come this year, said John Marciano, a partner at Chadbourne & Parke LLP, who is guiding three other solar companies toward rated transactions this year.

“If a company can cash out their equity even a little bit through ABS, that is very helpful,” said Marciano. “Real equity is very expensive relative to securitization.”

Track Record

One of the deals Chadbourne is advising may be as small as $25 million, he said, adding that Kroll Bond Rating Agency is also working through sample data to model for credit risks unique to solar financing.

John Kerschner, head of securitized products at Janus Capital Group, said he’s still unsure the asset class has a good enough track record, given the lengthy maturities of the bonds.

“My view is that SolarCity’s deals are structured with fairly long weighted-average lives of the bonds,” he said in an e-mail, referring to seven-year terms on past bonds. That “makes me nervous for an emerging-technology and unproven business model.”

Corporate green bonds issued by companies with more than half their exposure to the clean energy value chain reached a record of $18.6 billion last year, according to Bloomberg New Energy Finance.

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