SolarCity Trades Small, Steady Lease Payments to Get Cash Today

  • Raises $227 million from 201-megawatt solar lease portfolio
  • Deal intended to increase cash flow for biggest U.S. installer

Leasing is the driving force behind the fastest-growing U.S. solar industry, but surging installation figures haven’t translated into swelling cash flow at SolarCity Corp.

That’s why the biggest U.S. rooftop solar installer developed a new financing source, a “cash equity” investment that monetizes the revenue stream from a portfolio of solar leases. SolarCity announced the first such deal Tuesday, a $227 million transaction with Manulife Financial Corp.’s John Hancock Financial unit.

SolarCity’s leasing model is attractive to customers, who typically get rooftop systems with no upfront costs. That provides decades of small monthly payments, which don’t do much to boost quarterly operating profit. While the company’s installations swelled 73 percent in 2015 to 870 megawatts, it reported negative cash from operating activities of $790 million as it poured revenue into building more projects. The John Hancock deal lets SolarCity monetize leases, getting cash now to fund its operations.

“It helps us grow profitably, and it helps make the business cash-flow positive,” Radford Small, SolarCity’s executive vice president of global capital markets, said in an interview.

‘Attractive’ Return

“This transaction was highly awaited,” Sven Eenmaa, an analyst at Stifel Nicolaus & Co., said in an interview. “There’s been a lot of investor hand-wringing in terms of what shape and form this transaction would look like, and with what investor. This is an attractive investor, and there are attractive IRRs.” He estimated an internal rate of return, or IRR, of about 8 percent for John Hancock.

Under the deal, John Hancock will get the majority of the cash flow from a 201-megawatt portfolio of residential, commercial and industrial leases. San Mateo, California-based SolarCity retains ownership of the systems and will be responsible for servicing them, and will also get 99 percent of any payments after the leases expire. SolarCity raised $3 a watt, according to a statement -- an average of $3.24 for residential projects and $2.35 for commercial systems.

“We are starting to see developers look to sell these assets in order to raise the cash required to sustain and grow the operations division of the business,” said Hugh Bromley, an analyst at Bloomberg New Energy Finance. 

Solar Bonds

This isn’t the first effort to monetize solar leases. SolarCity was the first rooftop developer to adapt the asset-backed security, or ABS, model, bundling together contracts to create a security that can be sold and traded. It also offers solar bonds to retail investors through its website. 

“It’s a further diversification of our financing sources,” Small said. “It’s an alternative to ABS, it doesn’t replace it.”

“It’s an all-of-the-above strategy,” said Pavel Molchanov, an analyst at Raymond James Financial Inc, who expects other rooftop solar developers to follow SolarCity’s lead. “It’s exactly the right approach.”

SolarCity’s efforts to develop financing tools shows that the solar industry is still evolving, said Nathan Serota, an analyst at Bloomberg New Energy Finance.

“If you think about any industry in its nascent form, they all go through a Wild West period before maturing,” Serota said. “It happened for oil at the turn of the 20th century and for dot-com companies in the ‘90s. It may now be beginning to happen for residential solar in the U.S.”

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