SolarCity is testing the market for securities backed by solar panel leases for the first time since several states introduced legislation that raises questions about the cost savings associated with these assets.
The deal, SolarCity LMC Series V, Series 2016-1 will issue $52.15 million of A notes rated BBB+ by Kroll Bond Rating Agency and BBB by Standard & Poor’s and $5.3 million of B notes rated BB+/BB. All of the notes have an expected maturity of September 2022 and a final maturity of September 2046.
At closing the overcollateralization will be approximately 24.8%. The Class A notes will also benefit from subordination from the Class B Notes equal to approximately 6.9%. And at closing a liquidity reserve account will be fully funded to cover 6.5 months of interest on both the Class A and Class B notes. The initial deposit in the liquidity reserve will be approximately $1.7 million.
Credit Suisse Securities and Goldman Sachs are the joint bookrunners and structuring agents.
Discounted payments on solar leases represent 48.3% of the collateral pool and power purchase agreements represent 51.7%. The original tenor of each agreement is 20 years. As of October 31, 2015 the weighted average remaining term of the loans is 224 months and the weighted average FICO of the underlying customers of the photovoltaic systems is 750.
Customers with a FICO equal to or greater than 700, which could typically be classified as “prime,” represent 78.7% of the loans.
However, three states, California, Nevada and Hawaii have recently passed legislation that raise questions about the costs savings that solar assets produce for residential consumers. According to both S&P and Kroll, a reduction in savings could make customers less likely to continue making payments.
Consumers with rooftop solar panels often generate more power than they need, and under net metering arrangements they may sell this excess power to the local utility, offsetting their electric bills. California represents the largest geographic concentration of solar lease payments in this deal, at nearly 58%. In January, the California Public Utilities Commission approved a proposal that rating agencies believe will have a minimal impact on existing and prospective solar customers.
But in December 2015, the Nevada state legislature directed the Nevada Public Utilities Commission to make changes Kroll believes will cause an increase in selective defaults in the state because the value proposition associated with a residential solar system for the net metering customer will change dramatically, particularly if existing customers are not grandfathered. However, photo voltaic systems in Nevada represent just 0.27% of the deal’s collateral.