Why Leverage and Liquidity Are Big Concerns in the Solar Industry

Long-term debt

The business models of downstream solar (TAN) players such as Vivint Solar (VSLR), SolarCity (SCTY), Sunrun (RUN), and the downstream operations of SunPower (SPWR) generate income over the terms of their customers’ agreements. These agreements typically last 20 years.

Most of the capital required for these companies’ early expansions has to come from outside sources. As a result, it’s important for the companies to maintain liquidity and asset quality in order to raise capital at low costs.

Why Leverage and Liquidity Are Big Concerns in the Solar Industry

At the end of 2Q16, SolarCity had the highest debt among its peers. The book value of SolarCity’s long-term debt was $2.8 billion, followed by SunPower’s $1.7 billion.

The book values of Sunrun’s and Vivint Solar’s long-term debts stood at $0.77 billion and $0.55 billion, respectively.

Interest expenses

Why Leverage and Liquidity Are Big Concerns in the Solar Industry

The interest expenses of major downstream solar (TAN) players SunPower, Sunrun, Vivint Solar, and SolarCity are in line with their outstanding debts. In 2Q16, SolarCity’s interest expenses were the highest among its peers. SCTY reported interest expenses of $27.7 million, followed by SunPower’s and Sunrun’s $13.1 million each, respectively. Vivint Solar reported interest expenses of $7.4 million.

Liquidity position

At the end of 2Q16, SolarCity had about $361.7 million in cash and cash equivalents on its balance sheet. Its peers Vivint Solar, Sunrun, and SunPower had cash and cash equivalents of ~$69.6 million, $207.2 million, and $590.1 million, respectively.

In addition, SunPower had about $300 million available under its revolving credit facility. Sunrun and SolarCity had about $340 million and $428 million available, respectively, under their existing credit lines.

Next, we’ll discuss the relative valuations of downstream solar players after their 2Q16 results.