Why SolarCity’s Leverage and Liquidity Position Are Important

What Do Analysts Expect from SolarCity’s 1Q16 Earnings?

(Continued from Prior Part)

Why leverage and liquidity are important

The business models of downstream solar (TAN) players like Vivint Solar (VSLR), SolarCity (SCTY), 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 such companies’ early expansion has to come from outside sources. As a result, it’s important for a company like 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 increased more than three-fold in the last two years. The company reported an interest expense of $27.1 million for 4Q15. This increase is 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 non-recourse (debt backed by collateral) 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.

As of December 31, 2015, more than 50% of the value of megawatts deployed has been monetized by the company. However, SolarCity plans to increase the velocity and magnitude of asset monetization to meet its expansion goals.

Debt structure

As of December 31, 2015, the company had about $2.8 billion in consolidated debt on its books. This is up from ~$1.4 billion as of December 31, 2014. Of the nearly $2.8 billion, ~$1.5 billion is the total recourse debt and the remaining amount is the total non-recourse debt.

According to company filings, the majority of SolarCity’s recourse debt is due to mature in November 2019. However, the majority of the non-recourse debt is due for payment in December 2017.

As of December 31, 2015, the company had more than $382.5 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.

Also, investors must look at delinquency rates and the average FICO score of the company’s residential portfolio to determine the quality of the underlying assets. As of December 31, 2015, delinquencies of 180+ days were below 1% and the average FICO score stood at 747.

Browse this series on Market Realist:

• Part 1 - Can SolarCity Outshine Its Peers in 1Q16?

• Part 2 - What Are Analysts’ Ratings for SolarCity?

• Part 3 - Why Analysts Expect SolarCity’s Revenue to Fall in 1Q16