LESS ENERGY FOR AN EMERGING ASSET CLASS

The securitization industry might have lost a potential issuer, at least for a while.

On Monday, solar developer SunEdison announced that it would acquire Vivint Solar for $2.2 billion.

One of SunEdison’s preferred methods of funding is by dropping its projects — most of them in the large-utility business — into TerraForm Power, a vehicle known as a yield co.

This is also what it said it will do with the 523-megawatt, residential solar portfolio held by Vivint, the second biggest U.S. residential solar developer after SolarCity.

And that means those assets won’t be available for an asset-backed.

A yield co is a publicly traded company formed to own assets that generated a predictable cash flow through long-term contracts, in the case of solar, power purchase agreements. They've been used predominantly by developers that own large utility projects, such as power plants that provide energy to industry. 

SunEdison didn’t return an emailed request for comment as of press time.

SunEdison has never issued a securitization. Observers have said that utility-scale providers of solar energy don’t especially need to access this form of financing, given the opportunities presented by yield co’s and other low-cost funding sources.

But residential solar — basically photovoltaic systems on the rooftops of houses — is generally regarded to be the segment most amenable to securitization. This is the reason that in the four securitizations to date backed by solar assets, collateral has been either mostly residential (SolarCity) or entirely residential (Sunrun).

While the residential solar business still poses some obstacles to doing an asset-backed — lack of standardization and short track record — it offers some advantages to securitization as well. For instance, metrics such as credit scores that form the backbone of securitization analysis in other consumer sectors are easily translated to residential solar.

Ratings — and how they affect pricing — is another factor influencing developers’ cost of capital. Standard & Poor’s said earlier this month that its ratings on solar deals would, for now, be capped at ‘BBB’ because of the industry’s short performance history. The most recent transaction, a debut from Sunrun, received an ‘A’ from Kroll Bond Rating Agency, yet priced wide of the previous deal in the sector, a deal from SolarCity rated ‘BBB’ from S&P. 

As part of the acquisition, TerraForm Power will purchase the Vivint portfolio for $922 million in cash. The yield co will received a $960-million unsecured bridge loan from Goldman Sachs Bank to finance the transaction. The deal will also be partly funded through a $500-milion secured debt facility between SunEdison and Goldman.

In a press release SunEdison said the Vivint portfolio has an expected unlevered annual cash available for distribution (CAFD) of $81 million, generating 9.5% 10-year average levered cash-on-cash yield.

SunEdison now expects to have a capacity of between 4,200 MW and 4,500 MW in 2016.

BofA Merrill Lynch was the lead financial advisor on the acquisition.

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