SolarCity Corp (NASDAQ:SCTY) announced this week that it’s taking the first steps to bring solar securitization to the U.S. Of course the goal of the solar asset-backed bonds is to reduce the cost of capital, but Raymond James analyst Pavel Molchanov questions just how much the company’s efforts will cut those costs.


Details on SolarCity’s announcement

According to Molchanov, solar asset-backed bonds were first issued by SunPower Corporation (NASDAQ:SPWR) almost three years ago. They were secured by solar projects in Italy. Of course this concept is pretty much the same to traditional mortgage-backed or credit card-backed bonds except that the assets are a pool of solar leases or power purchase agreements.

This week SolarCity Corp (NASDAQ:SCTY) announced its offering of $54.4 million in solar asset-backed notes which are due in 2026. At this point we don’t know the price of those notes, and Molchanov thinks it will be “intriguing” to learn what the yield will end up being.

How much will SolarCity lower the cost of capital?

At this point it’s so early in this plan of solar-asset backed bonds that it isn’t clear how much of an effect they will have on the cost of capital. SolarCity Corp (NASDAQ:SCTY) and other companies which are introducing this type of bond are betting that the costs of solar financing will meet up with traditional financial products like mortgages over the long term. Molchanov notes that this is important if SolarCity is going to achieve “the retained value metrics” the company’s management has detailed.

SolarCity will release its September quarter results later this week, but according to the company’s June quarter results, which indicated $662 million or $1.27 per watt of retained value, credit would be ascribed for a long term discount rate of 6%. That compares to current tax equity financing rates which are in the 7% to 12% range.

The analyst doesn’t think SolarCity Corp (NASDAQ:SCTY)’s first bond tranche will be priced as little as 6% since it’s the first of its kind and sets a precedent. He believes that the company will accept a higher coupon for this first set of bonds. If the bonds perform well, then future issuances will receive higher credit ratings and be priced lower.

Molchanov continues to rate SolarCity as Market Perform.