Earlier this month, SolarCity (Nasdaq: SCTY) announced a solar financing milestone, stating its intent to offer solar securitization -- the first securitization of distributed solar energy assets. The company said they'd offer a private placement of $54,425,000 of an aggregate principal amount of Solar Asset Backed Notes, set to mature in December 2026. Last week, the solar installer announced that the notes would have an interest rate of 4.80%, and yesterday the company announced that it has completed the placement.
In a recently released statement, the company noted: "The notes are secured by, and payable solely from the cash flow generated by, a pool of PV systems and related leases and power purchase agreements and ancillary rights and agreements that will be owned by SolarCity LMC Series I."
SolarCity's pool of solar contracts received an investment grade rating of BBB+ from Standard & Poor's. The rating reflects the predictability and quality of the cash flows and the minimal operation and production risk of solar assets. Distributed solar is one of the first new asset classes to achieve an investment grade rating in the asset backed securities markets in the past several years.
As part of the rating process, SolarCity hired independent engineering firm EL Garrad Hassan to perform a technical and operational review of both SolarCity and the pool of assets. EL Garrad's assessment of the company’s full-service model included design and installation process and quality, system performance against forecasts, servicing standards, procedures, and history.
"This transaction is a breakthrough and will pave the way for others," said Bob Kelly, SolarCity's CFO. It's also significant, he continued, as a "validation of the quality of SolarCity's assets. SolarCity lowers what is typically the highest operating cost for households and gives them long-term control over that cost. Customers highly value those attributes, and that's why these assets perform so well.”
Credit Suisse acted as sole structuring agent and sole bookrunner for the transaction.
"The transaction represents a tremendous breakthrough for SolarCity and the distributed generation solar industry," said Steve Viscovich, Credit Suisse banker. "By accessing the securitization market, SolarCity has tapped into a large pool of highly efficient capital that can be used to fund its continued growth while significantly reducing its costs at the same time."
"Securitization gives us access to a new source of capital at a lower cost, and it allows us to more closely align our assets and liabilities," Kelly added. "We offer fixed price contracts, and by financing them with fixed rate debt, we bring a greater level of predictability to our financing activities."
Although the $54 million offering is relatively modest, SolarCity's completion of this solar financing milestone is an important step for the solar industry. It represents the industry's first step toward securitization going mainstream. Securitization will help lower borrowing costs and provide a funding source for residential, commercial, and utility-scale solar projects, resulting in billions of dollars of new potential financing for the solar industry.
Currently, companies like SolarCity can get federal tax benefits when they use equity financing to pay for systems. However, when the equity financing is paid off, they need a new financing option. That's where securitization comes in. It's a great option for solar companies because it's backed by solar assets, which are relatively secure. Therefore, it doesn't pose a risk to the solar company itself.
Completion of this first private placement paves the way for other solar companies to use securitization as a financing source. This new financing option should allow for further growth of the solar industry.