Any time you get a few solar financiers together, the conversation inevitably turns to the potential of financial tools and pooled assets such as securitization, REITs, and MLPs to disrupt the world of solar finance.
If those conversations are right, then today is a red-letter day.
SolarCity just announced its intent to offer a private placement of $54.4 million of an "aggregate principal amount of Solar Asset Backed Notes, Series 2013-1 with a scheduled maturity date of December 2026," as per an SEC document.
That's securitized solar, and it's the first time it's being employed for distributed PV. (We published The Encyclopedia of Solar Securitization in September.)
As defined by GTM's Stephen Lacey, "Securitization is the practice of pooling disparate sources of debt and selling it as a package to investors on the secondary market." You might recall that process being applied to package debt such as mortgages and loans as part of the machinery of the recent global financial crisis. Nevertheless, in solar -- securitization improves liquidity and can spur demand. (Securitization could be applied to energy efficiency as well.)
Financing lore has it that the debt is usually packaged in $100 million increments, so the $54.4 million number might be due to SolarCity cherry-picking the contents of that particular asset pool. SolarCity could not comment at this time.
GTM Research's Shayle Kann notes that this is the "first securitized portfolio of distributed solar assets" and likely comprises "the cleanest, most standardized" debt. He noted that the next step in the process is for a ratings agency like S&P or Moody's to provide a rating for the pooled asset. From there, an investment bank markets the asset to institutional investors.
Kann sees this as potentially "a bigger deal than a solar REIT or MLP." He said it was "no surprise that SolarCity is the first; expect to see Sunrun and others take a shot."
A positive credit rating and strong reception could "open the floodgates" of solar finance, according to Kann.
The investment bank Baird has noted a positive initial reaction for securities that "could reduce SCTY’s cost of capital and increase company returns," adding that it was good news for SolarCity and the solar industry. SolarCity has its Q3 earnings call later this week.
It's fair to say that distributed solar has just reached the scale where it can access larger pools of once-unavailable, lower-cost capital. It's another piece of the equation where solar is cutting cost and going mainstream.
Rob Day of Black Coral Capital said, "This will be a good opportunity to see institutional investors validate the distributed solar asset class. 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. SolarCity is the first mover here, but I expect they’ll be soon followed by other financing platforms like Clean Power Finance, OneRoof, Sunrun and the rest. Accessing low-cost capital will be a key competitive factor for this industry as it consolidates over time."
Ed Feo, the COO of energy developer Coronal Management, thinks this is a big deal, saying, "It provides for long-term debt (maturity of 2026) placed with qualified institutional buyers. This is a milestone on the way to broader capital market financing for solar assets. Although the debt is non-recourse to Solar City, it would be interesting to know the extent of support through service agreements by Solar City and backup servicers required to market the institutional debt."
Feo added, "It's the kind of deal I would expect from a market leader."
Securitization is one of the hot solar topics to be explored on the upcoming Standardization and Securitization panel at GTM Research's U.S. Solar Market Insight conference in December. Panelists include Yuri Horwitz, CEO of Sol Systems, Richard Mull of KPMG, and Nicholas W. Lazares, Chairman of the Board and CEO of Admirals Bank. Learn more about the conference here and register here.