SolarCity Corp (NASDAQ:SCTY) announced its first public bond offering last week, creating another option for investors who like sustainable energy stocks but are concerned by the company’s share price performance lately. SolarCity shares have skyrocketed since the initial public offering in 2012, but since the beginning of this year, their value has declined by more than 40%, thus scaring off many investors.
The company’s solar bonds offering, might interest investors who like SolarCity but are looking for more stability, but are they a good choice?
How SolarCity’s bonds work
A report from Tom Konrad of The Guardian suggests that they might be the right investment for some small investors who are looking to invest more in solar. In his article, he compared SolarCity’s bonds to other green energy investment vehicles.
Investors in all states may purchase the company’s bonds, which represent various energy products. The bonds begin at $1,000 and reach maturity within the next seven years. They offer a 4% interest rate, taking the price risk away from investors but swapping in a different risk. If SolarCity can’t pay the bonds back, then the investment is lost.
Some investors may be concerned by this or the fact that the company has only been around for eight years, making it seem especially risky to buy one of the company’s seven-year bonds, particularly because buyers are required to hold them until they mature.
Other solar bonds
The bonds being offered by SolarCity are the first nationally offered ones like them, although Konrad reports that Mosaic offers similar ones in New York and California. They’re only available in smaller amounts, with the smallest at $25. Usually the interest rates are higher as well.
SolarCity Vice President for Financial Products Tim Newell reportedly said his company’s bonds are better because they’re backed from the cash they receive from their solar leases. However, Konrad notes that this can also be a disadvantage because the bonds aren’t specifically tied to any particular leases. In other words, the company could use its cash flow from the leases for new commercial asset-backed bonds.
SolarCity’s bonds versus green CDs
CDs are always a safe investment, and it’s no different in the sustainable energy world. Banks like Certified B Corporations, Beneficial State Bank and others offer environment-focused CDs that are insured by the FDIC.
Of course with safety comes lower income, as the interest rates on CDs are far smaller than they are on SolarCity’s bonds.
One big trend in the solar industry right now is what are called “yieldcos.” The purpose of these investment vehicles is stabilizing cash flow by separating a company’s assets from its “volatile day-to-day activities,” according to Konrad. This essentially offers a partial shield for investors against risks that are created by regulatory changes.
Yieldcos could increase their dividends gradually, which could increase the companies’ stock prices. One of the yieldcos with the highest expected dividend in the next couple of years is TerraForm Power Inc (NASDAQ:TERP), a company David Einhorn talked up this week at the Robin Hood Investors Conference.
So what’s the verdict on SolarCity’s bonds?
Konrad believes that the bond offering from SolarCity does “fill an important niche in the sustainable investment market.” He notes that they’re easier to buy and pay more interest than CDs, but they’re riskier and can’t be sold or owned in self-directed retirement accounts.
He adds that they’re safer than yieldcos, however, so some small investors who are interested in sustainable companies might consider buying some of SolarCity’s bonds.