How securitization is helping secure solar’s future

I first reported on the securitization of solar assets back in November 2013 when SolarCity announced a $54 million offering. This small offering (by Wall Street standards) was a way for SolarCity to test the waters of a new financing outlet and potentially reduce its cost of capital. The 2013 offering was well received by investors and SolarCity now has more than just their toe in the water of solar securitization.

Refresher: Mechanics of Securitization

Before we go into the details of the recent securitization deals, it’s best that we have a refresher on what securitization is. Securitization is when an organization that makes lots of loans or leases to individuals, pools these contracted debt obligations together to sell to investors. Examples of securitization happen with mortgages, auto loans, airplanes, trains, credit card debt, and life insurance.

The advantage to the organization originating the debt is they receive a lump sum of money today rather than a series of payments over years. The originator can re-deploy this money back into their business and reduce their cost of capital. Investors like securitization because they are able to invest at scale and have built in diversification from the pool of debt. The downside to securitization is if the underwriting standards are incongruent with the risk profile of the debt higher default rates than expected can occur. This was one of the reasons why SolarCity’s first offering was a small one and designed certain risk reducing characteristics.

Latest Deals

In July of 2014, SolarCity closed their second securitization offering of $70.2 million in solar backed notes. The offering includes 6,596 solar systems and 87% of these systems are residential. The yield on the offering is 4.59%, just under the 4.80% yield of the first offering. It’s important to note that all of the investment characteristics of the second offering are equal to or better than the first offering. SolarCity was able to pool a larger number of systems and sell the systems at a lower rate while increasing the average FICO score of the pool.

After the success of the first two offerings, SolarCity followed up with a third offering in July of 2014 that was larger than the first two combined. The trend of improving investment characteristics continued in the third offering and enabled a much larger pool. The third securitization offering was for $201 million and includes almost 16,000 solar systems. The weighted average yield of is 4.32%, lower than the first two offerings.

Going Forward

With over $325 million of solar systems securitized, the solar industry now has proof of investment in this new financing outlet. It is expected that companies like Vivent and SunRun will jump into the securitization water with SolarCity. Given the warm reception from investors so far, it is likely that the next round of solar securitization investment pools will be larger than what we have seen so far. In addition, some expect securitization to take the place of tax equity as the primary capital source for the solar industry when the investment tax credit potentially phases out in 2016. Solar securitization is proving to be an effective source of low cost capital and is here to stay.

This article is published in collaboration with The Energy Collective. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Boyd Arnold is a renewable energy professional.

Image: Rows of solar panels face skywards at the Greenough River Solar project near the town of Walkaway, about 350 km (217 miles) north of Perth. REUTERS/Rebekah Kebede