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SolarCity Bailout Analysis

Discussion in 'TSLA Investor Discussions' started by SBenson, Jun 23, 2016.

  1. SBenson

    SBenson Active Member

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    #1 SBenson, Jun 23, 2016
    Last edited: Jun 23, 2016
    In my view, for SCTY access to (enough) capital is bigger issue than the cost of capital itself.

    At a high level, to do 1GW of installs it needs a capital of $3Bil or thereabouts. Even if it keeps it's install rate constant, it needs external financing of $3Bil each year.

    So if SCTY chooses to grow the rate of installs, even worse, it needs ever increasing amounts of external capital each year.

    For the longest time, Lyndon Rive famously/repeatedly claimed that SCTY will double it's installs each year for foreseeable future. Had he followed through on that, the capital needs from external financing would be something like:

    2016: $3B
    2017: $6B
    2018: $12B
    2019: $24B

    LOL

    Obviously this is unsustainable. For that matter even raising even $3Bil year in and year out is simply unsustainable.

    Essentially, the business model was to become Freddie Mac or Fannie Mae of Residential Solar, but with no backing from Treasury or Fed. Another big LOL.

    Anyways, coming to the specifics of the financing, some of it comes through asset-backed financing in one form or other but some has to come directly from SCTY. The more that comes in the form of asset-backed debt the better. So that's always the first priority. Second priority is to raise capital through financing against itself. Third is to deplete cash.

    When Lyndon Rive or Musk say that SCTY will become cash-flow positive, they are essentially saying that all company operations will be adequately financed through asset-backed financing. Thus, SCTY doesn't need to raise capital against itself or deplete cash.

    Over the last few quarters something became very apparent. SCTY effectively ran out of ways to find non-asset financing (second option).

    For instance it did a heroic raise in Q4 through the Silver Lake deal, which effectively amounts to avoiding the financial system to borrow from an old friend or brother-in-law.

    Period........Cash & Equiv....Change
    Q1 2016....361,660,992....-32,194,016
    Q4 2015....393,855,008....-24,511,008
    Q3 2015....418,366,016....-70,718,976
    Q2 2015....489,084,992....-86,764,032
    Q1 2015....575,849,024....-66,844,992
    Q4 2014....642,694,016....-90,764,992
    Q3 2014....733,459,008
    Q4 2013....577,080,000
    Q3 2013....132,986,000
    Q2 2013....159,606,000

    For context, even with Q1 ending figure, SCTY is operating with the lowest cash level since Q4 2013. The company operations more than tripled since then (#employees went from 4K to 15K), so it needs lot more cash in the bank to run it's day to day operations.

    In Q4 the cash drop blow was lowered through Silver Lake deal. In Q1 a remarkable number of asset financing options opened up and SCTY figured out a way to raise cash against old deals (existing pool of leases). So the cash depletion wasn't too bad. But as data indicates they were more of one time in nature than a going forward norm.

    You can look at all the press releases here to compare Q2 vs previous quarters in terms of how much funding opened up.

    I firmly believe cash depletion this quarter has been rather dramatic.

    Lets say the world comes to know that it's cash balance is sub 300Mln end of Q2, what will happen? Will financing partners, business partners and suppliers balk and say they can't do business with SCTY anymore?

    That's my suspicion. So Musk was desperate to shore up the capital and all desperate measures were already exhausted. So Musk is trying to make a last ditch attempt to save the firm (by taxing TSLA share holders).

    Future Scenarios:

    If merger falls appart, SCTY will end up declaring bankruptcy. It cannot possibly gradually scale down. The fixed costs will overwhelm. Even a small squeeze in asset-backed funding will thoroughly destroy it.

    If merger happens:

    SCTY's biggest problem is the business model. Especially the way it sources financing. It did it this way because it believed leases/PPAs were much more profitable. It deluded itself with gimmicky math and fairy tale assumptions. But with the recent Hancock deal, things became abundantly clear that SCTY is not making much money (in DCF) with this model. This is the first time it sold all of the contracted cash flows. So for the first time it got a realistic appraisal of what the value of the contracts is.

    So management finally woke up and said, we will do the sales/installs the traditional way where homeowners directly borrow from banks and will simply be facilitators and we would be just as profitable. Thus we get all cash upfront. No need for all these complicated financing schemes and gimmicks. No liquidity issues.

    This is the transition SCTY desperately needs. Which I and a few others have been advocating in the SolarCity thread for a long time.

    Once it is merged up SCTY will (or should) very swiftly scale down all these PPA/lease stuff and move into traditional sales model. But SCTY needs time and money for this transition. Tesla will provide that - is the idea.

    BUT, once SCTY is folded into Tesla umbrella, if it continues will it's old ways, rest assured it will destroy the mother-ship for sure. Absolutely positive on that.

    The reason the deal looks scary is that Musk/Tesla were actually praising SolarCity's creative financing schemes as a strength. If Tesla/Musk really believe that, we might as well run for the hills. I hope that is just sweet talk and they don't really mean it.
     
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  2. luca

    luca Banned

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    Am I wrong?

    Negative cash flow reduce very quickly

    seems close to break even

    eriod........Cash & Equiv....Change
    Q1 2016....361,660,992....-32,194,016
    Q4 2015....393,855,008....-24,511,008
    Q3 2015....418,366,016....-70,718,976
    Q2 2015....489,084,992....-86,764,032
    Q1 2015....575,849,024....-66,844,992
    Q4 2014....642,694,016....-90,764,992
     
  3. SBenson

    SBenson Active Member

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    Last two quarters were special circumstances. Not reflective of a trend.

    Without silver lake deal, Q4 cash depletion would be about 150mln.

    Q1 also special due to extraordinary financing in asset backed space.

    Q2 didn't have either.

    If SCTY publishes Q2 ER it will be toast next day. So musk trying to get ahead of it. Hence the rush to do this deal, despite this being bad timing in TSLA perspective.
     
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  4. luca

    luca Banned

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    if scty stop all installation

    will it get positive cash flow immediately?
     
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  5. SBenson

    SBenson Active Member

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    Absolutely not. Very far from it.

    Who will pay for all the existing employees (they are not contractors), existing facility leases, vehicle leases, etc. it takes time and money to even do a scale down or shut down.

    I think you are trying to differentiate between profitability and liquidity (not asking a specific operational question).

    Is SCTY genuinely profitable in a DCF analysis? That's a tough question. Maybe, barely.

    The real issue is with liquidity/cash-flow.
     
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  6. Vitold

    Vitold Member

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    #6 Vitold, Jun 23, 2016
    Last edited: Jun 23, 2016
    I gather that Musk wants to do value added solar to leverage, design capabilities, storage, integration and one stop shop. I did not sound like he wanted to continue SCTY business as usual at all.

    I think Tesla name and vertically integrated product offering would open-up new market that financing or PPA cannot address. Tight integration would also let Tesla do bundled deals with Utilities where they could offer peak distributed storage similar to what Advanced Microgrid did with Tesla Powerpack.
     
  7. SBenson

    SBenson Active Member

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    Lot of people don't fully appreciate. If TSLA takes over SCTY, it inherits all its debt as well. The true cost to TSLA shareholders is well north of 5Bil.
     
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  8. luca

    luca Banned

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    But 2GW worth 8B, is it correct?
     
  9. SBenson

    SBenson Active Member

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    Not sure what you are referring to. Can you clarify?
     
  10. luca

    luca Banned

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    scty already install 2GW, is it correct?
     
  11. sunhelm

    sunhelm Member

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    I do not follow Solar City so the above statement is perhaps a known generality. But can you please cite a source for the above statement? TIA
     
  12. Vitold

    Vitold Member

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    "When the numbers are viewed from a GAAP perspective, SolarCity is losing about $150 million per quarter, but what a lot of people don’t understand is that SCTY has $2.7 billion in net retained value after all the debt is paid off over 30 years. SCTY leases most of their systems, therefore the earning per quarter is stretched out over a long period of time. Therefore, I don’t see SCTY as an anchor for TSLA. In the short run this does not look good, but in the long run, everything becomes more cost efficient."

    quoted from article in Forbes: Why A Tesla Acquisition Of SolarCity Makes Sense
     
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  13. dakh

    dakh Member

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    Don't have time to dig into finances but the last couple quarters were uncharacteristic because they had a big loss in Nevada. I think we just need to wait for Q2 numbers to get a better idea. Since the acquisition is not going to be finalized for a while, we have the luxury of time for that.
     
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  14. TheTalkingMule

    TheTalkingMule Active Member

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    Great stuff as always SB, but the we are missing one vital ingredient. Elon will never abandon this business line, it's absolutely vital to his vision.

    To me all your analysis comes down to cost and growth. These guys(like a lot of us) thought growth would be no issue and sales cost would be down around $.45/W by now even with some new market troubles. That cost being double(or even the $.65/W it was before Nevada) makes the whole thing seize up.

    Banks would be more than happy buying into the SCTY PPA model forever if it were more profitable. IMO sales cost could be cut this low under the Tesla umbrella plus they only really need to buy themselves 6 months to let the market mature a bit and to get past the elections.

    So in many ways I think this is just a stalling tactic and an attempt to set a price floor. Not a bad idea.

    Well see how it goes. The real question is if it's utterly insane to buy $80 SCTY 2018 calls next week.
     
  15. neroden

    neroden Happy Model S Owner

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    #15 neroden, Jun 24, 2016
    Last edited: Jun 24, 2016
    And if SolarCity could finance with 30-year bonds at low interest rates, so that they'd be paying the bonds off when they actually get the cash from the leases & PPAs, then they'd be fine. They can't.

    Neither can Tesla, which is why merging with Tesla doesn't really get them out of that hole.

    As long as they stay in the business of financing the panels themselves (rather than making the customers get the financing in advance from a bank), then every install they finance digs them deeper into the hole.

    They've been trying to use the securitization model, such as was used by Countrywide etc. -- make the loan, then resell it -- but it's not reliable. Any time they can't resell, they get stuck with piles of debt on their books which needs to be paid way before the income stream will arrive.

    If Apple were offering to buy SolarCity, and finance them with its giant pile of cash, then I'd be very positive about such a merger. But Tesla doesn't have the financial stability to back this sort of banking operation.

    I want to see a plan for getting all of SolarCity's future installs fully financed prior to construction -- with no putback clauses which can force the costs back on SolarCity -- so that SolarCity gets out of the banking business. Furthermore, I want to see a plan for paying off the existing debt or refinancing it at much lower rates for a very long period. Do that, and I support the merger.
     
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  16. Ulmo

    Ulmo Active Member

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    Oh geez. I almost don't even feel like posting my very slow and novice response to this because it seems to just confirm my negative views and therefore just seem almost FUD-like since I've been pretty vocal already, which means a new posting from me is just a repeat at this point without much signal to noise ratio, but with that disclosure, I still post for my own records:


    Finally, I'm getting to read some about SCTY detail. First, I'm reading SBenson's OP. This gets some meat. I had to look up definitions. First was reading what happened with Silver Lake. I had to look up what Zero Coupon Convertables are. I read Zero-Coupon Convertible Definition | Investopedia which led me to read about Zero-Coupon Bond Definition | Investopedia and when I got back to the Zero Coupon Convertables, I immediately said "F-U!!" It's desperate (gets sold at discount): it pays (1) no interest, and (2) gets converted (at maturity, much further down the line), into uncommon stock of the same company that just paid no interest (the "un" part being a "pretty please" to the lender). So, step 3 would be turning the stock into something. What faith does that stock even have if the company doesn't even have any money at step 1 or 2 or 3? What sucker would buy that stock? Apparently, they hope it is me, since I'm the TSLA shareholder, not the SCTY shareholder.

    Ok, after reading the balance of SBenson's OP, I appreciate this a lot more. My conclusions:

    a. They are hiding the problem side of SCTY in this acquisition proposal.
    b. They are also claiming but apparently "hiding" the upside of this proposal, by claiming but not showing concrete product enhancements.
    c. SBenson's postulates are good to explain why this would be done: keep liquid while converting into a sensible spending arrangement (convert into prepaying everything rather than being a financier (with others' money)). But, that liquid comes from TSLA stock for cars and storage, not panels. No guarantee that (1) the existing debt wouldn't combust and (2) future panels would be profitable, and as I say in (d) below, (3) that they'd actually convert into prepay.
    d. SCTY could still take the money and keep increasing debt rather than going to all-paid status like we want them to (I presume I speak for more than myself there).
    e. The dream of solar won't die just because some financing shifted gears or went into neutral and started rolling down the hill backwards: there are other installers. Others have monstrously but I think correctly stated that SCTY could be bought by TSLA at fire sale prices further down the line rather than propping up their failures; as a TSLA shareholder, I'd rather see SCTY thin out a bit (shed debt and/or vastly lower its sale price, to nearly zero) before trying to contemplate picking it up. Plus, I'd want it to come with the factory and product lines it has to make it worth something to TSLA.
    f. TSLA WOULD HAVE TO NOT GET TOO COCKY even if it does do all these financing changes correctly (which is itself highly in doubt), since it might think it's the best thing since sliced bread when it comes to solar panels, but there's plenty of decent competition, and I'd want Tesla Energy to work well with the entire market, not just some bastard child.
     
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  17. dakh

    dakh Member

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    Not much of an expert but that looks to me like buying upper $500 strike price TSLA options. Crazy stuff.
     
  18. TheTalkingMule

    TheTalkingMule Active Member

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    Exactly, people see the model seizing up and say to scrap the model. It's not the model, it's the inputs. There's a hump that needed to be gotten over by now and they haven't, so each bit of growth becomes a struggle. With the most recent "monetization" it's unclear how much of a struggle, and I guess that could be described as part of the problem.

    They APPEAR to be financing more than 100% of install costs up front, but there's no way to really confirm.
    Fair enough. But if that were easy, why wouldn't everyone be doing it? You're describing the money machine that SCTY is trying to build. Amazon didn't just get to press go and become a money machine, it took years and years of deep debt to build.
     
  19. Krugerrand

    Krugerrand Active Member

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    They can't/won't hide it. They plainly said in the conference call that we'll be able to see everything as the process goes along. Due diligence will be done and per Elon unless something has been purposely hidden from the board, the board already knows everything. The odds of something 'bad', 'horrendous' being hidden from the board is less than zero. But if it is, then SCTY won't pass the sniff test (DD) and the deal won't go through. Elon would never risk Tesla and the master plan in such a manner.

    Not sure why anyone is confused or surprised about this. Revealing future products is a big no-no. That was also explained in the conference call. We also have several product/service reveals from Tesla over the past few years as examples of what happens when that info is released too early or too late.

    You're worrying about something that will never happen as long as Elon is steering the ship and I'm actually confused you'd even go down this road unless you haven't been paying attention. Ultra consistent message from him about being a) making the best products in the world/(and now) becoming the best manufacturer in the world after having build the best car in the world like he said Tesla would, and b) for mankind, willing to partner, opening patents, brokering deals that are always intended to be as fair as possible sometimes more to fair to others than Tesla (ie Nevada deal).

    Don't get sucked into the doom and gloom just because someone's yelling 'The world is ending!'. The world has been ending since the beginning of time. And we can take the current Brexit shenanigans as an example today. Look, we're still here and would you look at that the market is already starting to recover from the panickers.
     
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  20. Dwdnjck

    Dwdnjck Member

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    How long should this merger proces take? Any ideas?
     

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