A game-changing announcement by one of America’s largest solar installation companies could make investors more profit than ever…
For the first time ever, big banks such as Bank of America, Credit Suisse AG and Citigroup, are about to underwrite a round of securities to help finance a solar installation company.
Only these aren’t just your regular corporate bonds.
San Mateo, California-based SolarCity Corp. (NASDAQ:SCTY) announced on November 4th that it intends to offer a private placement of “solar securities” or “solar asset-backed notes” worth $54.4 million that is scheduled to mature in December 2026.
Investors will be paid in monthly installments from customers who have solar panels installed atop their homes and business properties.
This brand new financial innovation is taking the business world by storm with big banks and institutional investors eyeing this opportunity with great anticipation.
You see, the securitization of assets has long been a big money maker for banks and investors, and have helped numerous companies and people obtain financing.
It doesn’t matter if it’s car loans or commercial and residential mortgages or even credit card debt, as long as it has steady and predictable revenue streams, banks will figure out a way to pool that debt and sell it off to investors as asset-backed securities.
Investors stand to benefit. The banks get a cut.
And as Standard & Poor’s explains, “(securitization) may be a viable option for developers that wish to monetize cash flows from future lease or power purchase agreement payments. Such transactions could provide the issuers’ parents with a significant amount of upfront cash for capital spending or other business ventures.”
But Can The Sun Be Securitized?
Although this practice is nothing new, the idea of securitization for residential and commercial solar projects is a whole different ball game altogether.
For one, solar is a new industry and accurately projecting revenue streams into the future carries substantial risk since it has almost no track record.
In the case of SolarCity, their bonds have a maturity date of December 2026. It would be tough for anyone to accurately predict what will happen in the next 12 years.
And second, even if you’re able to calculate the risks and projected revenue streams there still aren’t any guarantees.
The use of sub-prime mortgages as collateral for bonds helped trigger the crash that led to the 2008 global economic crisis.
Could a move towards securities backed by solar assets potentially lead down a similar path as our mortgage crisis?
As with any type of asset-backed security, there’s always heightened risk because there are so many variables that the calculations fail to consider – and the solar industry would be no different.
However at the end of the day, we are talking about household and commercial power.
People could default on their mortgages or car payments or student loans and still manage to get by.
But would anyone really forego his or her electricity?
In fact, even Standard & Poor’s is optimistic that the rate of default for solar securities would be quite low, especially for early adopters of solar energy, as they tend to view alternative energy for more than just their economic/monetary advantages.
S&P believes that those who opt for a lease on a solar installation over connecting to the electrical grid are often motivated by sustainability reasons as well, which may contribute to a lower default rate.
This New Industry Will Be MASSIVE
Yet even taking all the potential pitfalls into consideration, you can’t hide the fact that the growth potential of this financial product is huge.
In the past decade, solar energy use in America has grown substantially.
According to the Solar Energy Industries Association trade group, the number of solar installations in the US is likely to grow by 75% to over 3,200 MW in 2013.
That’s enough energy to power approximately 700,000 homes.
Bloomberg estimates that the industry will need to raise about $4.6 billion in solar bonds to fund the number of new projects projected to be installed in 2014.
SolarCity’s $54.4 million offering might hardly be making a dent in this massive number. But if this first foray is successful, then the floodgates will be flung wide open for other companies to follow suit.
Securitized debt has the potential to attract new investors and help lower the cost of financing for the industry as a whole.
Eventually, it may even be a cheaper source of financing than borrowing from banks or selling equity stakes in projects.
As Rob Day, a partner at Black Coral Capital put it, ” Securitization is a win-win-win for homeowners, solar developers and investors: lower financing costs result in more affordable solar for homeowners; deeper capital pools enable developers to scale faster; and stable, long-term solar assets create attractive returns for investors.”
If you are a bond investor, take note of the ratings that these products receive but put these new solar-backed notes on your radar, as they could be potential cash cows for years to come.
And for equity investors, look to the solar companies that receive the liquidity from these bonds.
With being the first to make this historic move, SolarCity in particular has the potential to ride the momentum higher just for being at the front of the line.
But be warned, the chance to get in on SolarCity could disappear very shortly as its stock is already starting to garner the attention of Wall Street.