SolarCity stock continued its one-week nosedive today following the news that the company is seeking to raise capital in order to fund future growth. Today shares tumbled by as much as 12.42% to $37.45 per share, making up nearly half of the more than 26% decline that has come since Jan. 8.
SolarCity seeks funds
In a report dated Jan. 14, Bernstein analyst Hugh Wynne and team said they recently met with SolarCity management to talk about their financial strategy, and during the meeting, the executives explained the new capital raising strategy they are following as they consider potential options to support future growth.
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Currently, the solar panel installer’s position is a good one as the proceeds from its tax equity and asset-backed security financing are able to support the total cost of installing new rooftop systems. However, management understands that this situation probably won’t last, so they must seek new capital sources in order to pay for future growth.
SolarCity enjoys some competitive advantages
They also understand that SolarCity has advantages in the area of developing and installing rooftop solar power systems, the segment Wynne refers to as the company’s “DevCo.” In fact, the analyst said management sees this particular segment as being the only one in which it has “an enduring competitive advantage, and the opportunity therefore to earn excess returns on capital.”
Management sees no sustainable advantage in access to or cost of capital or in manufacturing, so as a result, they are considering to sell some of SolarCity’s assets in these areas in order to raise capital to support the DevCo segment. Proceeds from the sale would then be poured into the DevCo, which Wynne says likely will see another five years of fast growth because lawmakers recently extended the investment tax credit for solar panel installations.
Solar leases, loans, PPAs may go up for sale
According to Wynne, SolarCity management is looking into selling some of the solar leases, loans and PPAs that are generated by the DevCo in the near future to institutional investors like insurance companies or pension funds. At this time, the solar panel installer looks to use the new assets as collateral for its asset-backed securities—a trend that’s been occurring throughout the solar panel industry of late. The new approach, Wynne says, would be to sell all of the lease or PPA before it becomes securitized.
The analyst added that currently SolarCity is in negotiations on the discount rate that would be used to value the new leases and PPAs when they go up for sale. Management expects the first sale have a discount rate of between 7% and 7.5%, which is significantly higher than the discount rate they have applied so far when valuing the PowerCo portfolio, Wynne said.
He also reported that the first transaction under the new strategy will likely be fairly small with a value of between 100 and 200 megawatts of new systems, which amounts to between 6% and 12% of the solar panel installer’s installations as of the third quarter and 8% to 16% of the 1,250 megawatts worth of system it expects to install this year.
The Bernstein analyst estimates that this sale could raise between $150 million and $300 million and says that even over the medium term, SolarCity appears to be seeking direct asset sales that might supplement instead of replace the current asset-backed securities model.
SolarCity bulls might worry
He believes a sale of this size will “take some of the sting out of the bear arguments regarding cash flow and return on capital,” although he also thinks it would raise some “uncomfortable questions for bulls as well.”
“SCTY currently argues that the NPV of its levered project cash flows is $1.7 billion, based on a 6% discount rate,” Wynne wrote. “We estimate that using a 7.5% cost of capital (but keeping all of SCTY’s other assumptions), would imply a valuation of $1.35 billion, lower by ~$350 million, or 20%.”
Wynne has a $62 price target and Outperform rating on SolarCity.
More bad news
Wynne’s warning that bulls might become concerned about the new capital raising strategy wasn’t the only bit of bad news to weigh on SolarCity shares today. Last night, utility regulators in Nevada upheld the solar rooftop fees that went into effect at the beginning of the year. SolarCity and other solar panel installers have begun a mass exodus from the state as a result, leaving what had been a quickly growing and very lucrative market.
As part of the exit, the solar panel story is eliminating hundreds of jobs in Nevada.