SolarCity (SCTY)

[electracity]

This deal seems to be proof that SC had to cut back growth as they lost access to the bond market. Going to cash flow neutral seems to indicate a much lower future install rate.

Clearly the bond market does not value SC contracts as high quality. How does SC regain borrowing ability post ITC? I don't think I understand where the financing model failed.

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This is not a leak. ......

The point that there are a lot of overhead and risks not shown in cost per watt installed is valid. Sunrun may pay more per watt, but that mitigates a lot of risk. It also means in a post ITC retraction Sunrun will be able to take advantage of low bids, where SC will have the same cost structure.

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It's a good deal for both. Silverlake gets guaranteed return of capital with a juicy option. SolarCity shareholders get lower dilution.

Nevertheless, it's not a 'show of confidence' like the way NY Times tried to spin it.

Silverlake bought equity with only a little downside risk. Seems smart.

It's only smart for SC if they have lost the ability to borrow at good rates. Which they have.

 

[SBenson]

This is not a leak. This is how a business manages finances. The only reason to take a loss on an interest rate swap is because this is a hedge on interest rates and the market has simply reprised the instrument. This hedge protected us from interest rate increases but as expectations shift downward in the maket it loses value. Had the value gone up, the company 2ould have been in a much worse rate environment. So this is good news.

Also the only reason to take a loss on prepaying a loan is if you can lock in substantially better financing.

So both of these issues are about navigating long-term finances to a better situation. And it looks like our CFO is being quite proactive about managing interest rate risk. This is not a leak; this is about protecting shareholders against financial market risks.

Fine, it is not a leak. It is a cost of doing business, which is not captured in slide deck presentations. And hence my assertion that the costs and EVC in the slide decks are deceptive. They don't give the full picture.

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Silverlake bought equity with only a little downside risk. Seems smart.

It's only smart for SC if they have lost the ability to borrow at good rates. Which they have.

You seem to be speculating that they did this deal instead of another ABS (and they are unable to do an ABS). Seems like a stretch. Not sure why are relating these two things that way.

 

[TheTalkingMule]

Every time SC has bond sale there's a line out the door. Someone just bought $100M worth of LEAPS. What's the problem?

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Looks like SpaceX is about to win their first contract(of many) with the Air Force. Sanctions on Russian rockets may give SpaceX and ironic military monopoly in the short term.

Guess SCTY shouldn't have too much trouble finding purchasers for their bonds!

 

[jhm]

It's a good deal for both. Silverlake gets guaranteed return of capital with a juicy option. SolarCity shareholders get lower dilution.

Nevertheless, it's not a 'show of confidence' like the way NY Times tried to spin it.

Of course it is a show of confidence. Any investor who is not confident that SolarCity will survive and grow over the next five years would be unwilling to put $100M into such a deal. The return of capital is only as good as the company itself. So they absolutely believe in the solvency of SolarCity. Moreover, to get that 12% yeild you estimate, the stock would need to trade above $58 in the next 5 years. Sure they can try to monetize this by selling calls against the box of this callable bond, but their return on that depends substantially on how eager investors are to buy call options over the next 5 years. Now I do think that Silver Lake is being smart and taking advantage of company with a weak stock, but I fail to see how any investor would enter this deal if they did not think SolarCity had a promising future.

You might consider your own outlook. Would you be personally willing to put say $10k into this deal? If so, why not buy some of those convertible bonds already out there? Perhaps this is a risk profile that is more suitable for you at this time. It does not require a belief that SolarCity will grow enormously. It just has to be solvent long enough to payoff the bond, and the PowerCo Available Cash over the next 5 or so years may be sufficient to assure solvency and convertible debt repayment. If that fits with your outlook, buying convertible debt may be worth considering.

 

[electracity]

Every time SC has bond sale there's a line out the door. Someone just bought $100M worth of LEAPS. What's the problem?

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Looks like SpaceX is about to win their first contract(of many) with the Air Force. Sanctions on Russian rockets may give SpaceX and ironic military monopoly in the short term.

Guess SCTY shouldn't have too much trouble finding purchasers for their bonds!

Then you should be pissed that SC is diluting equity for no reason.

You bring in spaceX because you believe SC is a story stock. The market disagrees.

The good news is that Silverlake would not invest without the confidence that SC will do what is necessary to cut costs.

 

[jhm]

This deal seems to be proof that SC had to cut back growth as they lost access to the bond market. Going to cash flow neutral seems to indicate a much lower future install rate.

Clearly the bond market does not value SC contracts as high quality. How does SC regain borrowing ability post ITC? I don't think I understand where the financing model failed.

[Snip]


Silverlake bought equity with only a little downside risk. Seems smart.

It's only smart for SC if they have lost the ability to borrow at good rates. Which they have.

The bond market does not like to be treated as a cash machine. It expects equity to pitch in as well. So a certain amount of stock dilution is just part of the cost of raising capital through debt.

ABS offers are a bit of an exception to that because they are backed with assets. Even so, an ABS investor is going to want to know that the issuer retains a certain amount of equity in the ABS assets. This was one of the problems with MBSs during the mortgage meltdown. Originating lenders retained little to no equity in the MBS which led to unreliable lending. The lesson learned is that it is important for issuers to retain equity in their ABS. SolarCity does this quite elegantly. The renewal term on a lease or PPA is a portion of value which SolarCity retains. This is one of the ways that investors currently benefit from renewal values. It is enough skin in the game that ABS investors can have confidence that SolarCity will manage risks and properly service assets throughout the course of the ABS to preserve the equity in the renewal term. So this is part of why ABS offers are so well received.

But the catch in this is that SolarCity really must commit enough equity to these solar installations that they can continue to turn out ABS issues. Moreover, they need working capital to build out the systems and hold them on the books long enough to do another ABS. So I think this is where convertible debt becomes necessary. It expands equity enough to keep turning the ABS wheel. The problem for SolarCity with having the stock price so badly beaten up is that it makes raising capital through equity much more costly, i.e. the dilution required to access more capital from the bond market goes up.

 

[jhm]

So I wonder if this Silver Lake deal motivated Musk to by shares over the last week. It seems that allowing the share price to fall even further could have resulted in less favorable terms, like a share conversion price at $30 in stead of $33.

 

[TheTalkingMule]

Then you should be pissed that SC is diluting equity for no reason.

You bring in spaceX because you believe SC is a story stock. The market disagrees.

The good news is that Silverlake would not invest without the confidence that SC will do what is necessary to cut costs.

LOL....Silverlake is quoted in the article as to why they invested. Read the quotes. Or maybe it's a conspiracy. Maybe they invested $100M as part of a plot to tank a company they know has a failing model? I guess anythings possible right?

What else you selling today?

 

[SBenson]

The bond market does not like to be treated as a cash machine. It expects equity to pitch in as well. So a certain amount of stock dilution is just part of the cost of raising capital through debt.

ABS offers are a bit of an exception to that because they are backed with assets. Even so, an ABS investor is going to want to know that the issuer retains a certain amount of equity in the ABS assets. This was one of the problems with MBSs during the mortgage meltdown. Originating lenders retained little to no equity in the MBS which led to unreliable lending. The lesson learned is that it is important for issuers to retain equity in their ABS. SolarCity does this quite elegantly. The renewal term on a lease or PPA is a portion of value which SolarCity retains. This is one of the ways that investors currently benefit from renewal values. It is enough skin in the game that ABS investors can have confidence that SolarCity will manage risks and properly service assets throughout the course of the ABS to preserve the equity in the renewal term. So this is part of why ABS offers are so well received.

But the catch in this is that SolarCity really must commit enough equity to these solar installations that they can continue to turn out ABS issues. Moreover, they need working capital to build out the systems and hold them on the books long enough to do another ABS. So I think this is where convertible debt becomes necessary. It expands equity enough to keep turning the ABS wheel. The problem for SolarCity with having the stock price so badly beaten up is that it makes raising capital through equity much more costly, i.e. the dilution required to access more capital from the bond market goes up.

Here is an enlightening piece with respect to renewal "assumption".

This is related to CA NEM 2.0 from here:
"Homeowners with electric service under a NEM 1.0 tariff, prior to December 31, 2015, will remain on the current NEM tariff for 20 years from the date their distributed generation system was interconnected."

There goes the renewal. Poof. Gone. It has zero value.

Now if the argument is that SolarCity will sell a new system to support the new grid policies, that sale should be credited when it happens. Consumers have zero obligation to take up that sale. It is not appropriate by any means to credit SolarCity with a hypothetical sale that might happen 20 years down the line. No company ever gets valued like that. No one.

The renewal portion is an example of deception by management. They should have put it in footnotes (like they do with convertible bonds) instead of adding it up in the math and legitimizing it.

Coming back to the topic, there is no way in hell or heaven, the ABS market or any other market will accept renewal as the equity piece that SolarCity will be holding, while it mortgages away the rest.

In pre-ITC land, the Tax Equity partners hold the equity which is substantial at 30%. SolarCity can mortgage away the rest of 70%.

In post-ITC land, the Tax Equity guys only hold 10%. So SolarCity will be asked to hold another 10 or 15% before it mortgages the rest.

That's the reason why SolarCity maintaining a healthy profit margin (including *all* of the cashflows, while excluding the renewal portion) is crucial to it's survival. Or else it will have to continually come to capital markets to finance operations. That is unsustainable.

 

[Foghat]

So I wonder if this Silver Lake deal motivated Musk to by shares over the last week. It seems that allowing the share price to fall even further could have resulted in less favorable terms, like a share conversion price at $30 in stead of $33.

Elon is about to win a massive $70 bln military contract, with $1.5bln in projects this year alone. Elon's personally coming into a massive amount of sustained cash influx from spacex pay days now.

I feel he's maintaining his % ownership in Solarcity with recent purchases as well as demonstrating confidence in the company during this big slide period. He bought 198k shares in August, he bought 500k this/last week, and now he's committed to $10m in convertible bonds. Again, with the current influx of spacex cash coming, he'll continue to buy. He will also buy more solar bonds for spacex as well.

Its all about building confidence in Solarcity with the investment community now. Elon and family do not take well to unjustified attacks on their businesses, and this situation is no different.

 

[TheTalkingMule]

Elon is about to win a massive $70 bln military contract, with $1.5bln in projects this year alone. Elon's personally coming into a massive amount of sustained cash influx from spacex pay days now.

I feel he's maintaining his % ownership in Solarcity with recent purchases as well as demonstrating confidence in the company during this big slide period. He bought 198k shares in August, he bought 500k this/last week, and now he's committed to $10m in convertible bonds. Again, with the current influx of spacex cash coming, he'll continue to buy. He will also buy more solar bonds for spacex as well.

Its all about building confidence in Solarcity with the investment community now. Elon and family do not take well to unjustified attacks on their businesses, and this situation is no different.

Not to mention the 4/1 return he'll see on these investments inside of 2-3 years. The guy is socking away investments so he can cash out in 10 years for his big push to Mars. I know that sentence is bizarre, but I'm pretty sure that's what he's doing. What a nut.

 

[electracity]

That's the reason why SolarCity maintaining a healthy profit margin (including *all* of the cashflows, while excluding the renewal portion) is crucial to it's survival. Or else it will have to continually come to capital markets to finance operations. That is unsustainable.

Doesn't SC only need financing to continue to add customers?

 

[SBenson]

Doesn't SC only need financing to continue to add customers?

Yes, and that would be unsustainable.

If SC comes to capital markets for say working capital to support growth or new capex like factories which pay for themselves eventually, that will be forgiven.

But if SC will have to come to capital markets (to raise equity or borrow against it's own balance sheet) to support day to day (new) installs, they are doomed in some time.

The Business model needs to be sustainable. That is easy to achieve in pre-ITC era but much harder in post-ITC era, especially because the missing element is precious "equity".

 

[Lessmog]

Doesn't SC only need financing to continue to add customers?

Yes, that is the part I have been wrestling with these past few weeks. I don't understand the need to keep running faster, like the Red Queen's tea party or whatever in Alice. Yes, if they stop investing they will stop growing - but still have a steady flow of income. Sure, it would be nice if that income wasn't static but grew steadily too - and it seems like it will, only at a somewhat less neck-breaking speed going forward. Investment goes better with capital, owned or loaned, to be sure. The business as such should not need constant infusion though. Unless it is a Pyramid scheme, which is criminal anyway.

But then, I am not an economist (sometimes watch one or two on tv so what do I know.

 

[Rarity]

Elon is about to win a massive $70 bln military contract, with $1.5bln in projects this year alone.

Would be the first I heard about it. What are you talking about?

 

[electracity]

Yes, and that would be unsustainable.

If SC comes to capital markets for say working capital to support growth or new capex like factories which pay for themselves eventually, that will be forgiven.

But if SC will have to come to capital markets (to raise equity or borrow against it's own balance sheet) to support day to day (new) installs, they are doomed in some time.

The Business model needs to be sustainable. That is easy to achieve in pre-ITC era but much harder in post-ITC era, especially because the missing element is precious "equity".

They have the solar panel factory. Plus they could get back into selling solar as the market returns in the U.S.

I think their complex financial products gives them a relative advantage post ITC. The point of their products is to obfuscate value, after all. So they will have some buyers, even in a greatly reduced market. Perhaps they can finance the reduced demand post ITC with cash flow.

In that environment they would be profitable and cash flow positive, assuming a substantially reduced workforce. They could then return to the financial markets.

 

[Lessmog]

Would be the first I heard about it. What are you talking about?

Washington Post, among other sources:

Faced with competition for the first time, the United Launch Alliance said Monday that it would not bid on the next contract to send Pentagon satellites into space, a stunning announcement for a company that held a monopoly on national security launches for a decade.


The decision to bow out of the competition means that SpaceX, the only other firm certified for the launches, could walk away with its first lucrative Pentagon contract without a single rival in its way.

(Quote truncated.)
So it's either SpaceX or RusRockXport which is banninated due to war etc.
Advantage: Musk.

Edit: Elon has a well-deserved reputation for multi dimensional chess capabilities.

 

[Rarity]

Yes, and that contract is probably worth about $90 million.

 

[jhm]

Here is an enlightening piece with respect to renewal "assumption".

This is related to CA NEM 2.0 from here:
"Homeowners with electric service under a NEM 1.0 tariff, prior to December 31, 2015, will remain on the current NEM tariff for 20 years from the date their distributed generation system was interconnected."

There goes the renewal. Poof. Gone. It has zero value.

Now if the argument is that SolarCity will sell a new system to support the new grid policies, that sale should be credited when it happens. Consumers have zero obligation to take up that sale. It is not appropriate by any means to credit SolarCity with a hypothetical sale that might happen 20 years down the line. No company ever gets valued like that. No one.

The renewal portion is an example of deception by management. They should have put it in footnotes (like they do with convertible bonds) instead of adding it up in the math and legitimizing it.

Coming back to the topic, there is no way in hell or heaven, the ABS market or any other market will accept renewal as the equity piece that SolarCity will be holding, while it mortgages away the rest.

In pre-ITC land, the Tax Equity partners hold the equity which is substantial at 30%. SolarCity can mortgage away the rest of 70%.

In post-ITC land, the Tax Equity guys only hold 10%. So SolarCity will be asked to hold another 10 or 15% before it mortgages the rest.

That's the reason why SolarCity maintaining a healthy profit margin (including *all* of the cashflows, while excluding the renewal portion) is crucial to it's survival. Or else it will have to continually come to capital markets to finance operations. That is unsustainable.

Benson, what do you think the price of batteries will be in 20 years? NEM is irrelevant to the value of the renewal term. The value of the renewal term to the customer is that they can put off replacing their system for upto 10 years. The value of the renewal term to SolarCity today is that this is an obligation the customer must pay if they want to break the contract. The value of the renewal term to ABS shareholders today is that this value keeps SolarCity motivated to preserve the value of the asset and a positive relationship with the customer.

So the renewal term as value today. You seem to be stuck with the idea that the renewal term would only have value 20 years from now and only if the customer opts to renew. This utterly misses the point that it is part of a present set of obligations and actually has value right now. Moreover, what it is worth 20 years from now actually is too remote for shareholders to worry about. We expect at least a 12% annual return on such a stock and discounting out that far leaves very little value for anything. So it is the value today of the obligation that matters, not the cashflow some 20 to 30 years out.

 

[SBenson]

They have the solar panel factory. Plus they could get back into selling solar as the market returns in the U.S.

I think their complex financial products gives them a relative advantage post ITC. The point of their products is to obfuscate value, after all. So they will have some buyers, even in a greatly reduced market. Perhaps they can finance the reduced demand post ITC with cash flow.

In that environment they would be profitable and cash flow positive, assuming a substantially reduced workforce. They could then return to the financial markets.

Perhaps.

That's why I don't say that the company being doomed is guaranteed. Nor it's success is. In what shape and form will SC exist post-ITC is anybody's guess. Hence I call it a 'bet'.

It's neither value investment nor a growth investment. It's merely a bet that it somehow survives, without knowing what the odds are.

If Lyndon shows solid progress in all-in costs and CA NEM 2.0 comes out favorably, the nature of SCTY investment changes from a speculative bet to either value/growth investment.

Nevertheless selling panels to make money is the least likely thing to happen. When wind PTA went away apparently installs plummeted by 90%. BNEF is predicting 70% drop in solar installs in 2017. There will be a flood of panels. If SolarCity can't use it's own panels and all of their panels, it's game over, because the cost per panel goes up owing to fixed costs in the factory!