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.
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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