Why leverage and liquidity are important
The business models of downstream solar (TAN) players such as Vivint Solar (VSLR), SolarCity (SCTY), and Sunrun (RUN) and the downstream operations of SunPower (SPWR) generate income over the term of customer agreements. These agreements typically last 20 years. This means that most of the capital required for these companies’ early expansion has to come from outside sources. As a result, it’s important for a company such as SolarCity to maintain its liquidity position and the quality of its assets in order to raise capital at low costs.
SolarCity’s interest expenses
SolarCity’s interest expenses have increased more than fourfold in the last two years. The company reported an interest expense of $32.5 million for 1Q16. This increase was primarily due to an increase in debt raised by the company to fund its business expansion. On April 6, 2016, SolarCity announced the closure of a new $150 million nonrecourse financing facility with Credit Suisse to fund its commercial solar business.
SolarCity plans to monetize the value of its assets to decrease its dependence on external debt for upfront cash.
On May 2, 2016, the company entered into a financing arrangement with a third-party investor for a total committed amount of $227.4 million. According to company filings, SCTY monetized the majority of the cash flows from certain solar energy systems under leases or power purchase agreements through this arrangement.
Debt structure and liquidity
As of March 31, 2016, the company had about $3.2 billion in consolidated debt on its books. Of the $3.2 billion, ~$1.5 billion was total recourse debt (backed by collateral), and the remaining amount was total nonrecourse debt.
According to company filings, the majority of SolarCity’s recourse debt is due to mature in November 2019. However, the majority of the nonrecourse debt is due for payment in December 2017.
As of March 31, 2016, the company had about $362 million in the form of cash and cash equivalents on its balance sheet. Going forward, the company plans to raise capital through the monetization of its assets in the form of investment funds from existing and new investors.