SolarCity (SCTY)

[electracity]

The value of solar is in larger scale ground mount, which is half the cost of rooftop. Every PUC commissioner who is not an idiot understands the basic economics.

 

[jhm]

The value of solar is in larger scale ground mount, which is half the cost of rooftop. Every PUC commissioner who is not an idiot understands the basic economics.

This is one of the reasons why I am optimistic about SolarCity getting into commercial project. The ground mounted systems should be of comparable cost, and the Zep ZS system for large flat rows is very close. So even if a utility pushes feed in tariffs down to wholesale rates, these commercial customers can participate in a wholesale market with very little cost disadvantage to utility scale solar. Add to that a few Powerpack, and you've got something that can compete with any gas peaker when it is not otherwise self-consuming.

 

[drinkerofkoolaid]

Lyndon Rive will be the keynote speaker at this event.

https://greenchips.org/convene-green/convene-green-keynote-speakers/

 

[electracity]

Isn't great to be Lyndon Rive? Solarcity has never made a dime, and he has taken $47,340,739 in equity out of the company. Nothing better than the American dream of complex financial product and massive government subsidies.

 

[drinkerofkoolaid]

Isn't great to be Lyndon Rive? Solarcity has never made a dime, and he has taken $47,340,739 in equity out of the company. Nothing better than the American dream of complex financial product and massive government subsidies.

Mods, why is electracity still allowed to post here? He adds nothing to the conversation and posts nonsense that lacks any context. This post by him is a new low.

 

[hcsharp]

Bonds Detail
Bonds Detail

I dont really care but holding SCTY stock when bonds are trading like this, and this company needs capital like oxygen, seems irrational.
If nothing changes they are toast this year

Wow. They need to make some big changes very quickly. And they need to hope like heck that whatever they do, it works.

 

[Johan]

Excuse my ignorance, but is it not completely expected for the bonds to trade at significantly lower levels when shares have fallen to new lows (2013 levels)? In other words, what does the bonds data add to the discussion that we didn't already know from the stock price (that the market is pricing SCTY at at much lower valuation now than 6-12 months ago)?

 

[Ingenieur]

Bonds are guaranteed to be repaid, they are higher up in the Chain above Equity, Equity is an option on any potention profits/dividends, Bonds are a guarantee, if bondholders are expect not to get repaid (as bonds imply) shareholders right are nearly worthless, bondholders not repaid =Chapter 11 or restructuring.


These are very basic concept items, every investor should understand it before getting started (no offense here)

 

[jhm]

Wow. They need to make some big changes very quickly. And they need to hope like heck that whatever they do, it works.

As I have been posting, they need to increase working capital. It's been falling for 5 quarters in a row. This does raise genuine solvency concerns. In the last 10-K, the auditors raised no going concern issue, so SolarCity is in no immediate risk. Nevertheless, SolarCity does need to reverse this working capital trajectory and become cash flow positive by the end of the year.

 

[TheTalkingMule]

I despise cost, especially sales cost, that's why it took me a while to come around to the SCTY model. Cash positive is great, however I don't want to see this cost cutting for efficiency eat into the company taking marketshare as the only real PPA. The advantage they're building will be insurmountable and must be protected IMO. If the vision is for comfortable dominance in a few years when sales cost are super low then burning through a couple billion over the next 8 quarters is money well spent.

To the highest degree financially possible I still want the company borrowing. The stock price should not dictate direction other than setting an absolute limit for borrowing.

 

[flankspeed8]

Bonds are guaranteed to be repaid, they are higher up in the Chain above Equity, Equity is an option on any potention profits/dividends, Bonds are a guarantee, if bondholders are expect not to get repaid (as bonds imply) shareholders right are nearly worthless, bondholders not repaid =Chapter 11 or restructuring.


These are very basic concept items, every investor should understand it before getting started (no offense here)

Unless you are a big 3 automaker who has the rules re-written for them in chap 11.

 

[electracity]

Solarcity has started securitizing their solar contracts. The unsecured convertible bonds issued to date will be subordinate to these new loans.

- - - Updated - - -

The bolded line below. Why are they constrained to not borrow more than the net of their NPV minus unsecured bonds? Why can't they borrow against all of their contracts that have not been used for collateral? Is it in the terms of the bonds?

Just to preface: I am an ex-bull, who lost big. I have no stake in this game anymore. I am only doing this for 'fun' (for lack of a better word). I don't have an accounting background, I am a software guy.

Looks like you put in a bunch of inter-related questions. Let me start with the central question:

Why don't you think they can use the "PowerCo portfolio Pre-Tax Unlevered NPV Less Debt" to finance more debt?

First, elephant in the room: that number has massive renewal 'assumed' cashflows. Those 'assumed' cashflows can neither be sold or financed. Man, if only I can sell/finance 'hope'. lol.

So we need to look at the contracted portion of the cashflows instead. As a crude first start, we can start with cutting the 'PowerCo Portfolio’s Pre-Tax Unlevered NPV remaining' by half and then subtract the non-recourse debt.

Here is the table to make it easier for you:

Period		2014 Q1	2014 Q2	2014 Q3	2014 Q4	2015 Q1	2015 Q2	2015 Q3	2015 Q4
PowerCo Portfolio’s Pre-Tax Unlevered NPV remaining	$M	$1,030	$1,212	$1,445	$1,735	$2,032	$2,391	$2,790	$3,235
Estimated actual contracted NPV with proper discounting	$515	$606	$723	$868	$1,016	$1,196	$1,395	$1,618
Debt – Non-Recourse	$M	($206)	($324)	($448)	($485)	($617)	($731)	($1,013)	($1,242)
Net left NPV that can be potentially financed		$309	$282	$275	$383	$399	$465	$382	$376

.
The last line represents what is still left that possibly could still be financed (borrowed against). If you want, you can change the assumption on how much is contracted vs how much is not. But this is the general idea.

Now the next step, why do I not think they can use the last line to raise more cash ?

The answer is simple: If they could, they would have.

The latest ABS offer for $57.45mln is a dead give away that they run out of the financeable portions on the cashflows.

In Q3 CC and multiple calls before that management kept saying that we will see bigger and more frequent ABS. This ABS thing is very attractive for SolarCity because it's non-recourse and the cost of capital is quite cheap. They will try to exploit it as much as they can without doubt. So why only a measly $57.45mln? It's smaller than any deal they have ever done before, by far!

The simple logical answer is the rest of the portfolio/cashflows are not financeable this way for whatever reason. There could be many reasons for it, maybe the deals are over-capitalized by design. Maybe market doesn't take outer year cash flows. Maybe market doesn't like contracts from certain states, or certain fico scores, or certain demographics. We simply don't know. But really, if they could raise more cash this way they would have.

The latest $57.45mln deal makes it disappointingly obvious that they hit the limits.

Next question: "Why wouldn't the natural limits increase with the Unlevered NPV Less Debt?"

Yes, as they install more, the portfolio increases and they can finance more (hopefully). But the overall debt (both recourse and non-recourse) has been increasing at such a staggering pace that it is very unlikely that the non-recourse debt will be able to support the kind of cashflow needs. See my other tables in previous posts for deeper insights.

In my view, it's a dead surety that they won't be able to do 1.25GW. That kind of volume not only needs greater capital for the installs itself, but the so called DevCo needs to be scaledup to be able to do it with additional capital. Here is another illustrative slicing of data:

Period		2014 Q4	2015 Q4	Change
Debt and Cash:
Debt – Recourse	$M	($143.70)	($602.50)	$458.80
Debt – Convertible	$M	($796.00)	($909.00)	$113.00
Cash & Short-Term Investments	$M	$642.70	$393.90	$248.80
Current Portfolio Value
Cumulative MW Deployed under Energy Contracts – EoP	GW	1	1.7
PowerCo Portfolio’s Pre-Tax Unlevered NPV remaining	$M	$1,735	$3,235
Debt – Non-Recourse	$M	($485)	($1,242)	$757.00
PowerCo portfolio Pre-Tax Unlevered NPV Less Debt	$M	$1,250	$1,993
Total				$1,577.60

They had to spend $1.5 BILLION dollars in 2015, above and beyond any incoming cash (customer payments, itc, srecs), to do 870MWs of installs. This year they are talking 1.25GW of installs. How much cash would they need to spend? $2Bil? 2.5Bil? It's anybody's guess. Try to model it out as a fun exercise. But they can't raise capital anywhere close to that. Guaranteed.


Next question: "Why didn't they run into these limits before now? What has changed?"

My simple explanation is numbers became bigger to a point it is unsustainable. You can always grow your debts up to a point. But then you can't.

The ability to borrow non-recourse debt I believe will be somewhat linear to the portfolio size. But the recourse debt is where the problem is. The ability to borrow there depends on the vagaries of the market. If they were to come to the bond market today, they will be charged north of 20% interest! given how their debt is trading in the market. I also think that the rest of the assets, like warehouses and inventories, don't scale the same way for borrowing as non-recourse debt does. But they need both kinds of debt to be able to accomplish that 1.25GWs.

Here too we have a dead give away from the management itself. They want to sell a portion of the assets (contracts). Why would they want to fundamentally change the business model, if they can happily borrow money instead?

Somebody ought to model out how the dynamic changes when they slow the growth rate. The debt binge we are seeing is partly due to rocket-ship growth in 2015. So how less of a capital strain would it be if they were to grow slower (or not at all). Nevertheless all indications we see don't point to anything rosy.

PS: Take a look at the first post in this series. The last row in the table represents the 'debt burden'. It is an approximation of contracted-debt vs contracted-revenue. Does the trend look sustainable?

 

[SBenson]

Solarcity has started securitizing their solar contracts. The unsecured convertible bonds issued to date will be subordinate to these new loans.

- - - Updated - - -

The bolded line below. Why are they constrained to not borrow more than the net of their NPV minus unsecured bonds? Why can't they borrow against all of their contracts that have not been used for collateral? Is it in the terms of the bonds?

I answered that question (from my perspective obviously) in the same post that you quoted. Right below the bolded line

The answer is simple: If they could, they would have.

The latest ABS offer for $57.45mln is a dead give away that they run out of the financeable portions on the cashflows.

In Q3 CC and multiple calls before that management kept saying that we will see bigger and more frequent ABS. This ABS thing is very attractive for SolarCity because it's non-recourse and the cost of capital is quite cheap. They will try to exploit it as much as they can without doubt. So why only a measly $57.45mln? It's smaller than any deal they have ever done before, by far!

The simple logical answer is the rest of the portfolio/cashflows are not financeable this way for whatever reason. There could be many reasons for it, maybe the deals are over-capitalized by design. Maybe market doesn't take outer year cash flows. Maybe market doesn't like contracts from certain states, or certain fico scores, or certain demographics. We simply don't know. But really, if they could raise more cash this way they would have.

 

[electracity]

I answered that question (from my perspective obviously) in the same post that you quoted. Right below the bolded line




[/COLOR]

Your saying you don't know. I thought some else may know, especially what is in standard bond agreements that prohibits net negative borrowing.

I do agree about the $57 million deal being close to a smoking gun. It's like seeing your neighbor that lives in a big house getting a payday loan.

 

[SBenson]

Your saying you don't know. I thought some else may know, especially what is in standard bond agreements.

I do agree about the $57 million deal being close to a smoking gun. It's like seeing your neighbor that lives in a big house getting a payday loan.

The ABS bond prospectus are not public info. So it would be hard for anyone to find precise answers. The ratings review documents are public though. So maybe some one can dig into those to find any relevant info.

 

[electracity]

The ABS bond prospectus are not public info. So it would be hard for anyone to find precise answers. The ratings review documents are public though. So maybe some one can dig into those to find any relevant info.

Not the ABS bonds, the terms of convertible bonds.

But it may be as simple as the fiduciary responsibility of corporate officers.

 

[SBenson]

Not the ABS bonds, the terms of convertible bonds.

I can't imagine convertible bonds blocking the securitization of assets (contracts). Convertible bonds are backed by SolarCity's credit. It would be very weird if they have covenants like that. I would have to check the prospectus to know for sure, but I really would be shocked if we find something like that.

 

[electracity]

What if the ABS is being bought by insiders? There was a lot of equity taken out in 2014/15. That could be interpreted as swapping equity ahead of a decline in value for superior secured debt. The insiders protect both their remaining SCTY investment, as well as their capital.

5% ABS seems low consider the extraordinary effort it would take for an outsider to capture the value of the solar contracts in case of default.

 

[jhm]

I think slide 10 in the Q4 2015 Review deck helps clarify the issues. The portion of cashflows that is uncommitted is the Levered Project Cash Flow, the green area. Most of the green area is 10 or more years out. Tax-Equity and ABS financing disproportionately take cash out of the early flow. So over the next 5 years the LPCF is about $80M per year. I think that SolarCity needs to keep this flow as a cushion against whatever it may face over the next 5 years. It is simply not wise to overcommit all the cash.

The challenge is how to access the cash that is more than 10 years out. The renewal terms are contingent upon customer elected renewals, and in this time SolarCity will need some latitude to make counter offers, whether upgraded systems or discounted renewal prices, to maximize value. So this pretty much needs to be owned by equity investors. The middle years, 10 to 20, are interesting. Cash to common equity rises pretty fast. So that could be a pretty nice time to own share, but how can the company monetize this now?

I should point out that SolarCity raises an incredible amount of capital withe debt and tax-equity partners, but it does not match this so well with raising equity. I think this is the basic imbalance that is causing some structural strain. To alleviate this, I believe SolarCity should consider offering preferred stock as it raises project capital.

Notice that the unlevered NPV is around $1.20/W at 6% discounting. So this can spin off about 7.2c/W/year. This is an interesting basis for a preferred stock dividend policy. Suppose you issue a share of prefered stock that entitles this owner to the residual cash flow on 10 W of contracts after all debt payments, tax-equity payments, O&M expenditures and taxes. Valuing this dividend stream with a 6% discount is simply $12/share. So I think preferred stock investors would pay $6 to $10 per share for this. So as SolarCity grows it's book it can issue more shares, this funding growth. So this enables SolarCity to monetize the longer term cash flows while balance debt financing with equity financing.

Another curious advantage of this is that it allow the market to determine the value of the PowerCo holdings. Suppose common equity investors want to know what the market really thinks the 1.7 GW that the PowerCo owns is worth. Suppose there are 50M preferred shares in circulation trading at $8/sh. So that places $400M on on 500 MW of PowerCo holdings. If the PowerCo holds 1700 MW in total, then it is valued at $1.36B, of which common shareholder have a claim to $960M in residual value.

I think this could be a better arrangement than spinning off a yeildco. The prefered shareholders own a virtual yeildco, while common shareholders have full control over the PowerCo and the capital structure is all held together in one entity. This would enable SolarCity to attract both dividend investors and growth investors. The growth investors would be attracted to common shares, and since the prefered shares provides a clear market value on the PowerCo book, it becomes much easier for growth investors to value the growth opportunities distinctly. For example, suppose SolarCity were to get into a DER aggregation scheme as an additional revenue stream. This is separate from the cash flow that funds preferred share dividends. This is pure growth for common shareholders to enjoy.

So I think offering prefered shares could be quite beneficial for creating a more robust capital structure.

 

[blakegallagher]

What if the ABS is being bought by insiders? There was a lot of equity taken out in 2014/15. That could be interpreted as swapping equity ahead of a decline in value for superior secured debt. The insiders protect both their remaining SCTY investment, as well as their capital.

5% ABS seems low consider the extraordinary effort it would take for an outsider to capture the value of the solar contracts in case of default.

The reason it is low is the unprecedented level of repayments. They currently enjoy repayment about as close to 100 percent as you can get