SolarCity (SCTY)

[jhm]

Bonds Detail
personally these seem like a bargain to me, guaranteed 20%-25% annual return, unless SCTY goes to zero.
But be aware, BTU, Peabody had similar bargain bonds in the not too distant past too.

The core issue is that as costs of solar decline, the value of solar assets decline. Its real simple. The faster the decline of solar costs, the faster the decline of solar asset value. TOU is coming, even to California. Any home owner with their own solar on their roofs knows the replacement are (a, lower cost & b, greater capacity). Perhaps PV leasees may not care, but people looking to purchase the house, and their financiers do.

I've got to object to the idea that the value of a PPA or lease is linked to the value of the solar system. This is not collateral lending like a mortgage, where the borrower has a kind of put option on the value of the collateral in the form of a default. (I work in mortgage finance.) In practice, very few mortgage investors would every default strategically to excise this option even when their home is severely below the remaining balance. Rather, even in the recent housing crisis. Defaults were driven by financial distress, especially the loss of employment, rather than decline in home value. The difference that negative equity makes is that in financial distress the borrower may be unable to find a buyer who will pay more than owed on the home. Hence, lenders will work out short sales and loan modification options. But this stuff does not really apply to a solar lease, loan or PPA.

The key risks for SolarCity are financial distress coupled with decline in the value of the home, not decline in the value of the solar system itself. So basically, it is the next mortgage/home price crisis like we saw 8 years ago that SolarCity needs to worry about. First, SolarCity customers are obligated to pay their lease or loan in full regardless the value of the systems (unless SolarCity fails to keep it in working order). Failure to do this is default and will have serious credit implications for the borrower. So it is extraordinarily unlikely that anyone would strategically default just to get a cheaper solar system. The almost necessary condition for someone to default is financial distress, in which case mortgage payments and other financial obligations are also at risk. A home owner in serious financial distress with positive equity in their home has the sale of their home as recourse. So if the housing market is in fair condition, this way out resolves the problem for SolarCity. The obligation to SolarCity is transfered to the new homeowner or embedded in the purchase price of the home. So the key issue here is home equity inclusive of the value of the solar system. The same would be true if a home owner had financed any other sort of home improvement like a new roof or HVAC system. If there is sufficient equity in the home, the destressed homeowner walks away with cash in pocket and seeks a more affordable living situation. They have their dignity and creditworthiness intact, which is a much better way to start over. So finally, the situation that gives the borrower the fewest option is when their home value has declined such that the have negative equity. At that point options depend on what the mortgage lender is willing to work out. A loan modification would work well for SolarCity because loan modifications make allowance for paying utilities which would include a SolarCity payment. Here the objective of the bank is to determine what the borrow is reasonably capable of paying for total homeownership and adjust the terms of the loan to meet the budget. The budget will include SolarCity payments, so in principle the bank is satified that the borrower has the means to make those payments. When it comes to a short sale or foreclosure, it become more difficult to say where SolarCity stands. In foreclosure, the bank takes possession of the property and is in no obligation to SolarCity. However, SolarCity may have the right to remove the solar system. Thus, whatever value that system may have can be withdrawn from the total value of the home. The bank will understand this and will likely want the system to remain. My guess is that most banks will agree to allow the system to be transfered to the next owner or pay some nominal amount for it when it is sold. A bank may even be willing to assume payments while it is bank owned if there is a need to keep power on in the property, otherwise, the bank will try to minimize all costs to carry. So this is all very messy stuff and very rare.

Keep in mind that some of the major investors in SolarCity are themselves sofisticated mortgage lending banks such as Bank of America. Such institutions are keenly aware of the complexities and risks of home and home equity lending. So personally, I have great confidence that they have the ability to undestand and quantify the credit risk facing SolarCity, risks that they are immediately exposed to by financing SolarCity.

So if you got lost through all that, the key risk is total home value decline coupled with customer financial distress. It's about another boom-bust cycle in housing, not the positive advance of solar. A nice proxy for this real risk, then, would be MBSs (Mortgage Backed Securities). When MBS investors become worried about a mortgage crisis, then it would be time to worry about SolarCity and its ABS instruments.

 

[jhm]

Chanos is doing all that he can to destroy Tesla and SolarCity. The goal of these companies is building sustainable energy and transportation to solve the global warming crisis. With malice and forethought he is profiting from the destruction of our children's future.

I hope he rots in hell. Too strong? I think not.

That may be a bit strong. But if we are going to invoke divine judgment in the afterlife, perhaps we can invoke divine assistance to move investors and consumers to make the right investments in this life. I remain eternally optimistic. Most people really do want to believe that a better future for this world is possible. Hope matters. The merchants of FUD are just petty pickpockets. They have no hope in this life or the next.

 

[TheTalkingMule]

Slightly below current utility price but with an escalator so on average over the contract more expensive than current utility rates.

Yes, as long as it lowers the cost, but it doesn't, residential solar is much more expensive.

If you take the variables and twist them until they fit your argument, then yes buying from the utility is cheaper. Perfect logic.

If you sign a contract for electricity 13% cheaper than the grid with a 2% escalator and your grid has an average annual price increase of 4%, well then you're probably in good shape. And that's before solar has even had a chance to destroy the utility's profit scheme, in which case grid prices go up much more than 4%.

Most of the world has accepted this as fact by now and that may be the reason you find yourself repeating the same concept over and over to people who simply believe you are wrong.

 

[gigglehertz]

Chanos is doing all that he can to destroy Tesla and SolarCity. The goal of these companies is building sustainable energy and transportation to solve the global warming crisis. With malice and forethought he is profiting from the destruction of our children's future.

I hope he rots in hell. Too strong? I think not.

Living well is the best revenge. Let's use these dips to accumulate and burn him eventually when a short squeeze happens.

 

[TheTalkingMule]

That may be a bit strong. But if we are going to invoke divine judgment in the afterlife, perhaps we can invoke divine assistance to move investors and consumers to make the right investments in this life. I remain eternally optimistic. Most people really do want to believe that a better future for this world is possible. Hope matters. The merchants of FUD are just petty pickpockets. They have no hope in this life or the next.

I am of the opinion that FUD is a shortcut to investor capitulation(if you can survive the volatility). All investor concerns must be satisfied before major positive sentiment will be showered upon SCTY. All Chanos is doing is forcing SCTY to make that happen. He's drawing a straight line that he and all the rest of us know is not reality, but it's a valid conversation piece. If that's the way he chooses to make his money, then so be it. Nobody likes gonorrhea, but I'm sure it plays a vital role in evolutionary biology.

 

[TheTalkingMule]

This article was from back in March, my apologies if it's been discussed. This just blew my mind and makes be excited to hear the outcome of the


Arizona Study Claims Solar Leasing Companies Can Afford to Make Net Metering Changes

As part of the UNS proceeding, APS recently released the results of a study that seeks to shift the thinking on net metering. The report, conducted by Navigant Consulting, estimates that solar companies earn a 40 percent project return on rooftop solar leases in UNS territory, which undermines claims that rate reform will cripple the industry and kill jobs.

"We conclude that solar TPO [third-party-owned] providers have headroom to adjust to some changes in rate structures while maintaining project returns,” the report states.

Jeff Guldner, senior vice president for public policy at APS, said the report is designed to end the gridlock on solar policy discussions.​

These guys are so stuck in the monopoly mindset they don't even realize consumers can do whatever they like. We are under no obligation to provide zombie profits utility tasks that have become obsolete. A regulated utility is there to perform tasks that cannot be handled efficiently by a marketplace and they are given a nice chunk of profit for the job, end of story.

If this is the logic they're bringing to arbitration it's going to be a delicious victory for solar. I believe it's happening very soon and will only last two weeks.

 

[Jack6591]

Tesla Confirms Details of Powerwall Improvements

2500 units sold.

 

[jhm]

I am of the opinion that FUD is a shortcut to investor capitulation(if you can survive the volatility). All investor concerns must be satisfied before major positive sentiment will be showered upon SCTY. All Chanos is doing is forcing SCTY to make that happen. He's drawing a straight line that he and all the rest of us know is not reality, but it's a valid conversation piece. If that's the way he chooses to make his money, then so be it. Nobody likes gonorrhea, but I'm sure it plays a vital role in evolutionary biology.

Well that is more in line with my comments of appreciation around shorting LNG. That is, shorts can play an important roll in overcoming over-investment in a given company or industry. The over investment in LNG also perpetuates over investment in natural gas and under investment in renewable energy. So I am happy to see short provoke traditional energy investors to recalibrate their expectations of return, but it is best to do this on the basis of facts and sound reasoning. FUD, as I understand it, is emotional manipulation that plays very loose with the facts and often deploys deceptive reasoning. If an investor shorts where there is truly over-investment, that is an economic good, and there is little need to use disingenuous media tactics.

In the case of SolarCity, I do not believe there is any real over investment going on. Still some benefit is derived simply by challenging SolarCity to do a better job articulating their business model and providing meaningful metrics with which to gauge progress. This is important because this industry is fairly novel in how they create value, so transparency and robustness are very important to securing ongoing capital. That is, a poor job in communicating business model and financial results would lead to under investment in this industry, and that under investment would have negative economic impact. Incumbent industries like utilities and oil & gas have the advantage that business models and performance metrics have long been worked out and investors pretty much buy into them at face value. For example, the oil industry measures "demand" in barrels, not dollars. This fosters the illusion that "demand" is still increasing even though aggregate dollar amount that the world is willing to pay for crude is in serious decline. So in a proper economic sense demand is already well into decline. And yet the industry moves along with very unreliable metrics, and investors have great confidence that if "demand" keeps growing at 1.2 mb/d each year, that the price will eventually recover to $80/b or more. So this kind of conventional thinking needs to get shaken up. Where are the shorts harassing oil investors that they're following the wrong business model and using the wrong metrics? Well, I guess I'm doing my part.

 

[doggusfluffy]

FERC INTERCONNECTED: Federal Energy Regulatory Commission staff today will hear testimony from utilities and regional electricity market operators on what to do about revamping its rules for connecting new electricity generation to the grid. The commission called the all-day technical conference after renewable developers argued the interconnection policies are outdated and were holding back the clean energy projects the U.S. will need to hit its climate targets. One panel will focus on how to grease the skids for more large-scale and distributed generation battery storage projects.

 

[doggusfluffy]

Besides the rise of EV's, this could be another big demand driver as water becomes more expensive and scarce.

To Make Fresh Water without Warming the Planet, Countries Eye Solar Power

Desalination plants need to run 24 hours a day, requiring expensive battery packs to supplement solar power when the sun’s not shining. Thanks to increased efficiency and the falling price of solar power, costs are expected to fall rapidly: from more than $50 per 1,000 gallons today, in the Middle East, to half of that by midcentury. But that’s still likely too much to make solar-powered desalination economically viable without government subsidies, even in places such as the Middle East that are optimal for solar power.

 

[doggusfluffy]

SolarCity recommits to 1,460 Buffalo jobs, but more will be R&D and sales - The Buffalo News

“Automation at the plant means more hires can be directed toward research and development, as well as sales, installation, facilities, and management positions,” Doyle said. “Also note that the automation of the facility will extend its lifetime from 10 to 20 years.

 

[renim]

I've got to object to the idea that the value of a PPA or lease is linked to the value of the solar system. This is not collateral lending like a mortgage, where the borrower has a kind of put option on the value of the collateral in the form of a default.......

.....So if you got lost through all that, the key risk is total home value decline coupled with customer financial distress. It's about another boom-bust cycle in housing, not the positive advance of solar. A nice proxy for this real risk, then, would be MBSs (Mortgage Backed Securities). When MBS investors become worried about a mortgage crisis, then it would be time to worry about SolarCity and its ABS instruments.

nice theory, why are solarcity bonds at 20-25% yield?

the PPA's are bundled and sold off as an asset backed security. whats left is something akin to credit card fiance based upon good FICO scores but no collateral, thus the junk yield rates.
Is this a problem, perhaps yes, perhaps no.

trying to raise capital with a 20%-25% yield is a problem.

there are 2 debts here, the ABSs and the solarcity bonds. The ABS should continue to be mostly OK, but if ABS bonds have even a little bit of hurt, its the solarcity bonds that seem to carry that pain.

 

[electracity]

SolarCity recommits to 1,460 Buffalo jobs, but more will be R&D and sales - The Buffalo News

Sounds to me that they don't intend to fully build out the factory. That could be due to 1) Lack of capital 2) Lack of panel performance/value, or 3) A projected oversupply of panels in the next few years.

It seems they have a minimum factory employment number of 500 and have built a story from that number. Of COURSE it's a complicated and confusing story. That is how solacity rolls.

 

[jhm]

nice theory, why are solarcity bonds at 20-25% yield?

the PPA's are bundled and sold off as an asset backed security. whats left is something akin to credit card fiance based upon good FICO scores but no collateral, thus the junk yield rates.
Is this a problem, perhaps yes, perhaps no.

trying to raise capital with a 20%-25% yield is a problem.

there are 2 debts here, the ABSs and the solarcity bonds. The ABS should continue to be mostly OK, but if ABS bonds have even a little bit of hurt, its the solarcity bonds that seem to carry that pain.

The bond market often looks at stock prices as a basis to price bonds. The low stock price drives high yield on the convertible bonds. And yes, this is a way that shorts can drive up the cost of capital for target companies.

 

[Johan]

Just a thought: how low would SCTY have to go before Elon made a bid to take the whole thingamojang private? Below $10? That would be $1 billion, give or take a few millions. I was kind of disappointed he didn't buy the other day around $16.

 

[Rarity]

I doubt Musk would take SCTY private for valuation reasons. Musk has said that SCTY's providers of capital want it to be a public company so that it faces increased scrutiny of its books.

 

[doggusfluffy]

I don't know why Elon would want to buy a(nother?) doomed, failing company with an incoherent and unsustainable business model.

What SolarCity's new portfolio of grid services can do for utilities

"The services are only of interest to utilities if they are cheaper than the alternative,” Rive added. “But we would not be announcing these services unless we knew they are cost-effective for utilities.”

 

[jhm]

I don't know why Elon would want to buy a(nother?) doomed, failing company with an incoherent and unsustainable business model.

What SolarCity's new portfolio of grid services can do for utilities

Hey, this is very cool. I like that they can deploy quickly in areas like SoCal where the gas leak has disrupted gas power generation. They need these opportunities to get beyond the demonstration stage.

 

[jhm]

He is been busy bashing Cheniere for last 10mins non stop. About its debt, how the LNG spot market is bad etc. etc.

So we know he has nothing to do with clean energy, fossil fuels and such religious debates. He is simply a financial guy. Where he sees mispricing, he goes short and tells the world.

Here is a reference to his Cheniere short from about a week ago:
Chanos Calls Gas Exporter Cheniere `Excessively Expensive Bet'

Going after bigger game: Why Jim Chanos is Shorting the Oil Majors | OilPrice.com

I'd prefer to discuss this in the Shorting Oil thread.

 

[doggusfluffy]

Hey, this is very cool. I like that they can deploy quickly in areas like SoCal where the gas leak has disrupted gas power generation. They need these opportunities to get beyond the demonstration stage.

Agreed. Also it's looking like there will be plenty of opportunities from the SunEdison fallout. Chanos shorting oil now is a strange twist but he seems far more market dynamics motivated than ideologically to me...although I doubt he's a SolarCity ambassador today.

Solar bankruptcy forces Palm Springs to change course

Palm Springs isn't the only local government entity affected by SunEdison's financial troubles. The Palm Springs Unified School District planned to work with SunEdison on six new solar installations, although those contracts fell through before the company filed for bankruptcy, and it wasn't clear whether the district would renegotiate them.