IN DEPTH: Securities, a safe option?
For many people, the words “securitisation” and “asset-backed securities” still carry the stench of the US subprime mortgage crisis.
As pure financial vehicles, however, they are increasingly seen as representing a major opportunity — and possibly even rocket fuel — for the already booming US rooftop solar industry, opening up a new ocean of highly competitive capital.
Long suggested as an alternative means of raising capital, securitised solar broke through the surface last November, when SolarCity raised $54.4m by selling solar asset-backed notes at a 4.8% interest rate.
The pool of 5,000 or so rooftop PV contracts put together by SolarCity — first bundled together to mute the risk of any single contract defaulting, and then sliced up for sale to investors (much as subprime mortgages were) — was given a favourable BBB+ rating by Standard & Poor’s.
It was the first-ever sale of tradable notes backed by distributed PV assets, making solar one of the first new asset classes in recent years to win an investment-grade rating in the asset-backed securities market.
SolarCity took things a step further this April, raising another $70.2m through a second offering of securitised notes — this time at an even cheerier 4.59% interest rate.
SolarCity’s closest rivals remain cagey about when — or even if — they will offer their own securitisations. As smaller and mostly privately owned companies, they will face more obstacles than SolarCity, which went public in December 2012, and is now the single largest employer in the US solar industry.
But the expectation is that “we’ll see securitisations from three or four players in the next 12 months”, says Michael Mendelsohn, senior financial analyst at the National Renewable Energy Laboratory (NREL). “Hopefully it will open to an ever-widening pool over the next few years.”
The core business model of so-called third-party ownership (TPO) solar companies — like SolarCity, and smaller rivals Sunrun and Vivint Solar — explains why securitisation is potentially such a big deal.
SolarCity began life in 2006 selling rooftop PV systems outright to green-minded, cash-rich customers. It quickly realised, however, that it could greatly expand its market if it found a way to enable customers to get PV installed on their roofs without having to put down several tens of thousands of dollars upfront.
Today, more than 90% of SolarCity customers get PV systems installed on their rooftops through a lease or power-purchase agreement. In essence, SolarCity covers the upfront installation costs, but it retains ownership of the system — taking a cut of the revenue stream generated by the modules over the next 15 or 20 years.
For their part, customers typically see an immediate (if modest) reduction in their electricity bills, and their savings tend to grow over time, as retail power prices rise.
Historically, most solar TPO companies have financed their voracious need for upfront capital by arranging large financing funds with a fairly predictable handful of investors. For example, last year SolarCity pinned down a new $500m financing pot from Goldman Sachs, while SunPower recently announced a $100m commitment from Google.
Typically in such deals, these tax-equity investors provide the upfront capital in exchange for a generous claim to the tax breaks and, to a lesser extent, revenue streams generated by the PV systems installed.
For now, because the residential PV market is still relatively small in size in the US (with 792MW installed last year), and because it’s a hot space with investors, most solar TPO companies are not struggling to secure capital through one-off financing deals.
But the market is growing at such a clip that it will soon exceed what such “bilateral” arrangements can provide, says Dale Vander Woude, executive vice-president at OneRoof Energy.
“We need securitisation to be there in a year, year and a half,” Vander Woude says.
Securitisation will allow solar TPO players to tap the $1.2trn asset-backed securities market, which also includes things like credit-card debt, student loans and aeroplane leases.
Yet for all its obvious advantages, getting to the point of securitisation still poses a number of challenges to the solar industry. Perhaps the biggest is simply the industry’s lack of track record.
For investors to fall in love with in an asset class, performance data “needs to be both wide [in terms of the overall data] and deep [in terms of timescale]”, says Chris DiAngelo, a securitisation lawyer at the New York-based law firm Katten Muchin Rosenman
While calling distributed PV an “ideal candidate for securitisation”, DiAngelo adds that what’s really holding investors back is “the lack of historical information”.
At present, SolarCity is having to “over-collateralise” its securitisations to account for unknown future O&M costs, driving up its cost of capital, industry sources say.
Getting a grip on things like long-term O&M costs, inverter failure rates (likely to be a significant issue), or what happens when a pool of assets owned by one TPO player is taken over by a rival, will shake off the sense of unpredictability the PV industry currently suffers in the eyes of investors, preventing it from driving a harder bargain.
The industry’s reliance on tax-equity investors for upfront capital — unlikely to weaken any time soon — will also make it difficult for some companies to embrace securitisation, says Danny Abajian, finance director at Sunrun, a company often tipped as plotting an IPO. “The challenge right now is primarily one of [financial] structure,” Abajian says.
As solar matures, it will benefit from a variety of new financing structures and strategies. But under any scenario, securitisation’s role will grow considerably in the US over the next year or two.
But the industry needs to be patient, and not expect — or demand — too much from securitisation right away, says Thomas Plagemann, executive vice-president at Vivint Solar.
He points out that in 2012, MidAmerican snapped heads by issuing bonds to pay for its Topaz mega-PV project – and then turned around and did the same thing the following year on better terms.
“People got comfortable with the performance of PV panels three or four years ago, and now they’re getting comfortable with residential risk,” he says.
“The second SolarCity securitisation did better than the first one. It’s about incrementalism.”