SolarCity Corp (NASDAQ:SCTY) has announced the close of its Solarcity LMC I, LLC, which marks the first solar asset backed securities (ABS), and differentiates SolarCity as one of the most innovative public solar financing companies, say analysts Ben Kallo and Tyler Frank form Baird Equity Research.
ABS will help in lowering cost of capital
This will be the first solar asset-backed security brought into the market by a public company. Total principal of the security is $54.4 million with an interest rate of 4.80%, and will mature in December 2026.
Analysts note that the company has leveraged its assortment of projects to bring down its cost of capital. Further, it is expected that additional securities will be brought because SolarCity continues to install its PV systems. More asset-backed securities will assist in lowering the cost of capital as investors will be satisfied with the financing product. Higher rates will help in increasing the yield.
The report states that U.S. residential and commercial demand for solar PV projects will have 2012-2015 CAGRS of 21.9% and 14.1%, respectively, which will assist SolarCity significantly in enhancing its megawatts deployed each year.
Risks going forward
Analysts expect that in the long term SolarCity’s business model is subjected to risk on the back of increased scale-up challenges and the needs of tax equity funds. However, SolarCity has become one of the most innovative public solar financing companies.
SolarCity Corp (NASDAQ:SCTY) can capitalize upon expansion opportunities provided by the drop in its cost of capital and new financing methods. However, an increase in the cost of material will act as a negative catalyst, according to analysts. The company has launched the first solar asset backed security, which will be a positive factor for the solar industry, and supplementary asset backed securities can assist in further lowering the cost of capital.
PT raised for SolarCity
SolarCity Corp (NASDAQ:SCTY) usually signs lease/PPA contracts with a 20 year base term with a 10 year renewal option. For these contracts, the payment is done monthly, which provides an insight into sales and cash flow of the future. The company adopts the metric of nominal contracted payments remaining method to estimate the future benefits from its current system portfolio.
Analysts have an Outperform rating on SolarCity Corp (NASDAQ:SCTY), and have raised the price target from $50 to $71. The price target is based on the estimated net present value of the current contracted projects of SolarCity, and analysts’ expectations of the “projects deployed from 2014 through 2017.”