SolarCity Exploring Sale Of PowerCo Leases And PPAs To 'Fund' Growth, Bernstein Analyst Says

• SolarCity Corp SCTY shares have lost 20 percent since July 14.
• Bernstein’s Hugh Wynne maintained an Outperform rating for the company, with a price target of $62.
• Although the company’s current financial position is sound, new sources of funds need to be identified to fund growth going ahead, Wynne stated.

Discussion with management highlighted SolarCity’s new capital raising strategy, analyst Hugh Wynne mentioned. SolarCity currently has sufficient proceeds from tax equity and asset backed security financing to cover the full cost of installing new rooftop energy systems.

Wynne added, however, that this currently “enviable situation” is unlikely to last, and that the company would need to identify new sources of capital, if it wishes to continue growing.

In the report Bernstein noted, “Our understanding is that SCTY is exploring the direct sale of a subset of the solar leases, loans and PPAs generated by DevCo going forward to institutional investors such as insurance companies and pension funds.”

SolarCity is negotiating the discount rate that would be used in valuing its new leases and the PPAs for sale. The company expects the first sale to close at a discount rate of between 7 percent and 7.5 percent, which is significantly higher than the discount rate of 6 percent applied by management so far in valuing the PowerCo portfolio.

Wynne added that the scale of the first transaction is likely to be “relatively small,” representing the value of 100 to 200 MW of new solar systems.

“We would expect a $150 to $300 million asset sale at a discount rate of 7.5% to take some of the sting out of the bear arguments regarding cash flow and return on capital, but such a transaction would raise uncomfortable questions for bulls as well,” the analyst wrote.