What is next for Elon Musk’s “other” company, SolarCity Corp (SCTY). No one knows is the honest answer but with the sector in focus especially because of problems at competitors like SuneEdison, nut SolarCity is up 15 percent over the past five days. As Goldman notes: Following press reports of SUNE’s plans to file for
bankruptcy (WSJ, Debtwire), we have fielded an increasing level investor inquiries into potential for financial stresses across the solar sector. In our view, similarities to 2012-2013 – the last period of heightened liquidation events across the sector – are low. This time around, we believe the sector’s financing-intensive nature and company-specific execution issues have come to roost in a backdrop where cheap capital is now tougher to come by. What has resulted is an increasing disparity in balance sheet quality across the sector. So will SolarCity be a winner? here is what analysts are saying.
Solarcity corp SCTY analysts react
Deutsche Bank said in a recent note:
SCTY shares have been under pressure due to concerns over the ability to raise over $1b of financing and also somewhat due to concerns related to net metering cases in states such as NV, AZ and MA. We expect details around timing and availability as well as cost of cash equity financing to act as next set of catalysts for shares.
UBS noted recently
Filling Debt Capital Needs Remain the (Bigger) Focus
Management has been consistent in articulating that debt capital remains the focus on readily tapping it at adequate prices to meet its FY16 target. We see further ABS and bank deals as critical further follow up points towards execution in the above tally of capital needs. Mgmt is quick to point out ‘other’ solutions aside the three known routes: ABS, Bank Deals, and equity sell-downs of existing. We emphasize that limited liquidity, and cumulative bank limits should gradually slow down bank debt deals should ABS/institutional capital remain reticent to fund the sector. The aggregation facilities appear to be feared to be transient financing vehicles, ultimately with an eye towards refinancing around maturity of the tax equity arranagements.
Late last week we hosted SolarCity Corp in several investor meetings. By far the dominant topic was financing, primarily centered on cash equity monetization of rooftop cash flows with 3rd parties, with some questions also on ABS and additional credit access, as well as on regulatory front. With several term sheets received and being negotiated, the company appears to be making progress on the monetization front with the aim to deliver better IRRs than SolarCity’s current stock valuation implies. Our conversations did raise our confidence on probability of successful transactions over the next 6-9 months, and we are encourage on management’s continued focus on reaching the previously guided cash flow positive in 4Q16. However, while reward to risk in the stock over a 12-month horizon looks favorable to us, we view the transaction timing here as not without risks, which could have implications on 2016 installation volumes. We maintain our Buy rating, and revise our 12-month target price to $56.
While interest coverage varies widely, we note SCTY and rooftop solar peers RUN/VSLR screen at the bottom of the group as these models are not likely to generate positive EBITDA in the next several years at the corporate level owing to significant growth-related opex, though asset-level cash flows are much healthier. Similarly, GLBL ranks poor on this metric owing to its level of indebtedness and modest EBITDA generation vs. sector peers.
Debt composition across the sector has been skewed predominantly toward fixed rate paper. That said, pockets of variable rate exposure exist, with VSLR having borrowed almost exclusively at variable rates, with GCL-Poly and SCTY also screening high in terms of exposure in absolute terms.
So according to Goldman this rally for SolarCity Corp should be short-lived. Only time will tell.