SolarCity Corp (NASDAQ:SCTY) announced earlier this week that it raised $305 million in its second cash equity transaction, and this sent the stock up briefly. The company needed some funds desperately, and this deal did help a bit, but it has worsened the company’s long-term prospects, says a report from Seeking Alpha by Bill Maurer.
SolarCity stock losing value
SolarCity’s stock was quick to lose its gains, and it continued to trade at an increasing discount to where it should be, given Tesla Motors Inc (NASDAQ:TSLA)’s merger proposal. The cost of capital in this transaction was 7.4%, the company said, adding that it was lower than its previous deal.
However, the figure is slightly higher than the 6.5% bonds SolarCity recently sold, notes Maurer. The debt deal was met with a lukewarm response, and the majority of the bonds had to be purchased by Tesla CEO Elon Musk and some of his family members.
At the end of its second fiscal quarter on June 30, SolarCity had solar system assets worth more than $5.2 billion on its balance sheet. Those assets would create $3.1 billion in future payments on a net present value basis on being contracted with the assumption that the discount rate is 6%, notes Maurer.
Using different discount rates can significantly change the future payments, and the company has shown this in its Q2 earnings release. So if a discount rate of 7.4% is applied, then a few hundred million of those contracted dollars would be taken out, considering the company’s latest deal.
7.4% rate is higher than usual
A rise in the interest rates will lead to a further worsening of the situation, given a potential Fed hike, as it would lead to an increase in the cost of the debt portion of any future deals. Additionally, if SolarCity’s shares continue to weaken further, then investors may demand more of a risk premium on the equity portion, says Maurer.
SolarCity’s 7.4% rate is a lot higher than the 6% discount rate used in most press releases and earnings statements. Though the company does get an upfront payment, “We have to notch down future monetization potential here,” it said
Had the deal been really great, then SolarCity shares wouldn’t have lost all of their gains from the other day. SolarCity’s shares are approaching their 52-week low and since the merger agreement have seen a downfall of almost 37%. On Wednesday, SolarCity shares closed down 1% at $16.89. Year to date, the stock is down almost 67%, while in the last year, it is down almost 65%. The stock has a 52-week high of $58.87 and a 52-week low of $16.31.