SolarCity has obtained a credit rating for its inaugural solar-energy related securitization.
Standard & Poor’s said today it assigned a preliminary 'BBB+' ratings to a $54.42 million offering of notes to be backed by various solar assets, including customer agreements, solar equipment, permits, manufacturer's warranties, and cash flow associated with the ownership of such assets.
Securitization has long been eyed as a financing alternative that can lower the weighted average cost of solar energy products for customers. However it was unclear whether ratings agencies would be willing to rate an asset class that still lacks historical performance data.
S&P outlined its concerns over the risks related to customer contract reassignments and renegotiations for the asset class in research published in 2012. The report noted that the average homeowner is unlikely to stay in a home for the full length of a contract and the asset class could expose investors to the risk of a cash flow shortfall if a homeowner sold the residence, lost in a foreclosure, or even refinanced.
The presale report on SolarCity's Series 2013-1 deal cites as strengths the credit enhancement available in the form of overcollateralization, the manager’s operational and management abilities; the customers base’s initial credit quality; the projected cash flows supporting the notes; and the transaction’s structure.
However it said that the limited operating history of the asset class would likely constrain ratings to low investment grade for the near future.
The deal is being underwritten by Credit Suisse. It has a scheduled maturity of December 2026. The notes will be secured by a pool of photovoltaic systems and related leases and power purchase agreements and ancillary rights and agreements that will be owned by SolarCity LMC Series I, LLC.
SolarCity has data that speaks to the risk of renegotiation of customer assets before a contract ends, which S&P said could reduce cash flows to the transaction. Since 2008, the firm has been given permission to operate approximately 39,000 financed systems; of these systems, roughly 900, or 2.4% of the total, have completed contract reassignments, of which the overwhelming majority have experienced full recoveries. Of these 900, approximately 82% were reassigned as the result of the normal sale of a customer’s home (and not because of foreclosure, short sale, death or divorce). The remaining cases were because of various other reasons. In 91% of the contract reassignments, there was a full recovery and the remainder resulted in a weighted average recover of 78%.