SolarCity Deal Lights Way for Securitization

SolarCity may have created a securitization blueprint for the future last week with a new trade that sidesteps worries about repaying tax credits if the underlying collateral goes bust.

The company embedded a master lease provision in the trade to avoid triggering the repayment of those credits on any project in the deal that ends up in foreclosure.

Fears about such repayments have long stymied securitization in the solar sector, and indeed SolarCity is thus far the only entity that has sold a trade based on solar panel leases.

But its third-ever trade, the US$201.5m deal last Thursday, was seen as a breakthrough.

Instead of having the securitization vehicle buy the leases on the individual solar projects used as collateral, it only leases them - meaning the tax credits would not have to be repaid if a project goes bankrupt.

Even in a situation where a new owner swoops in to buy the business at bankruptcy, it would continue to run the project under the original master lease structure - thus avoiding a sale and keeping the tax credits undisturbed.

"The ABS industry thought that could not be possible," one market observer told IFR. "But [this deal] combined tax equity and ABS notes at the same time."

Tax equity is the "elephant in the room" when it comes to securitizing solar assets, said Ronald Borod, partner at DLA Piper, who specializes in renewable energy ABS but was not involved in the SolarCity transaction.

"If you already have tax equity in place and say 'I'd like to securitize now, are you okay with that?', chances are [your tax equity partners] would say no," he said.

Other solar companies could follow suit.

SunRun, Clean Power Finance, SunEdison, NRG and SunPower are some of the other major US solar competitors that will likely now look to securitization, as well as other facilities that offer low cost financing, said Haresh Patel, CEO of Mercatus Inc, which tracks data in the renewable energy sector.

"Access to low cost capital is a hot topic, and a lot of players are hitting SolarCity-type of volume," he said.

"It's sort of like a popcorn machine. You hear one pop and then start hearing others."


Sunny Subsidy
Investment tax credits (ITCs) have pumped billions of dollars of money into the solar industry, accounting for an estimated 40% of the sector in the United States.

It's unknown what percentage those subsidies play in the business of SolarCity, which is the number one installer of solar panels in US homes.

But investors clearly had confidence in the new trade from the company, whose chairman is Tesla Motors founder Elon Musk.

One source close to the trade said it was multiple times oversubscribed, which helped the borrower print its least expensive ABS financing thus far.

SolarCity ended up paying a 4.3% weighted-average coupon for two classes of bonds.

The BBB+ rated US$160m A class priced at interpolated swaps plus 180bp, tightened from guidance of 195-200bp, and offered a 4.02% coupon, while the pre-placed BB rated US$41.5m offered a 5.44% coupon.

The company's previous deal in April had just one BBB+ rated US$70.2m class, which offered a 230bp spread and 4.59% coupon, while its debut US$54.4m offering in November 2013 priced at a 265bp spread and 4.8% coupon.

Credit Suisse was the sole bookrunner on the deal, which is backed by leases on 16,000 solar panel systems mostly on residential homes, according to a Standard & Poor's pre-sale report.

A call and email requesting comment was not immediately returned.

(By Joy Wiltermuth, Reporting by Joy Wiltermuth; Editing by Natalie Harrison and Marc Carnegie)