Far Out Energy Finance, Man

Companies are finding it harder to raise cash.

Alternative energy is getting even more so. This isn’t a tale of tree-huggers hooking up batteries to their off-grid, geodesic hideaway in Sonoma, though. Think buttoned-up Wall Street instead.

Alternative financing brings the quirkiness in energy these days. SolarCity on Wednesday said it would raise $113 million from chairman Elon Musk, chief executive Lyndon Rive and private equity firm Silver Lake by selling them zero-coupon convertible notes -- which could be described as "uncommon stock." SolarCity is by no means alone. Rival SunEdison has sold about $2 billion of convertible bonds and preferred stock this year, including a perpetual issue.

What’s more, the mainstream energy sector has also been embracing the alternative finance lifestyle. Pipeline operator Kinder Morgan issued $1.6 billion worth of convertible preferred stock last month. In the exploration and production sector, both Anadarko Petroleum and Whiting Petroleum have sold convertible debt this year.

Overall, issuance of "converts" in the U.S. energy and utilities sectors is running at its highest level ever this year, according to data compiled by Bloomberg. The tally so far of $10.84 billion already beats that for the whole of last year, which was itself a record.


Conversion Therapy

U.S. energy and utilities sector convertibles issuance

Source: Bloomberg

* 2015 numbers are year-to-date

As with teenagers, music and cuisine, just because something is different doesn’t necessarily make it bad. Context matters, though.

Take SolarCity, whose stock has almost halved this year and which spooked investors recently by announcing plans to do something really alternative in the renewable energy sector: live within its means. The infusion of cash raised by the convertible offering is no doubt welcome. An optimistic reading is that the "smart money" is stepping in as everyone else steps back. But with the roster of insiders involved and the lack of commentary in the announcement about how the funds would be used, it seemed designed more to shore up confidence in the stock than anything else. 

Zero-coupon convertibles are equity-like instruments that won’t cost SolarCity precious cash in interest payments. Still, the senior ranking in the capital structure and the option of the buyers to get back their principal if the stock doesn’t rise to the occasion is an implicit insurance policy for them. Sure, they would pay the opportunity cost of foregone coupons, but given how underwater so many convertibles in the renewable energy sector are, the smart money can probably live with that.

The resort to more alternative funding reflects in part a cold shoulder from previously warm and cuddly public investors. SolarCity has been caught up in the general revulsion towards anything dappled with sunshine, as investors fret about the impact of lower fossil energy prices and the possibility of subsidies in key markets like California being curtailed. The company’s stubborn overheads and an average cash burn over the past year of almost $600 million a quarter haven’t helped, either.  

Much the same is true of Kinder Morgan. High leverage and growing doubts about growth plans in a $40 oil world caused its dividend yield to spike above 7 percent, forcing it to resort to convertible preferred stock that now yields above 14 percent. Such constraints are being felt across the energy infrastructure sector.

Alternative funding is a useful tool, but also a sign that a company or sector has lost the favor of the mob. Solar companies, E&P firms, pipeline operators: All have relied on easy access to mainstream equity and debt markets. Different funding is part of the bigger, more painful, process to a different business model, keeping pressure on these stocks for now. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Liam Denning in San Francisco at ldenning1@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

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