First Solar Bonds Financing $4.6 Billion U.S. Panel Boom

Underwriters from Bank of America Corp. (BAC) to Credit Suisse AG and Citigroup Inc. (C) for the first time are close to converting sunlight into cash to pay bond investors.

Similar to asset-backed securities that finance everything from car purchases to college tuition, solar bonds will help fund rooftop power projects that Bloomberg New Energy Finance estimates will need to raise about $4.6 billion next year. Investors will be paid from monthly payments from people with photovoltaic panels atop their homes and businesses.

Securitization will “open up substantial amounts of liquidity and credit capacity to an industry that doesn’t have it today,” said Bill Heskett, Bank of America Merrill Lynch’s managing director of asset-backed securities. He said the first deal may come in 2013 and declined to name potential issuers.

U.S. solar installations, including rooftop and utility- scale projects, may jump at least 75 percent to exceed 3,200 megawatts this year, enough to supply about 700,000 California homes, according to the Solar Energy Industries Association trade group. Developers are seeking new sources of funding after a U.S. tax incentive expired last year. They may have to pay higher interest rates than more established asset-backed bonds to attract investors.

Companies such as SunRun Inc. and SolarCity Corp. are booming in the U.S. by financing rooftop solar arrays without charging for installation. Customers lease the systems or buy the electricity, typically for about 15 percent less than standard power rates under 20-year contracts.

Esoteric Collateral

The bonds may help finance projects faster by tapping the global market for asset-backed debt, which Asset-Backed Alert newsletter estimated at $416 billion in 2011. Investors with an appetite for risk may be targeted, as revenue streams from rooftop solar projects have little track record.

Bankers have traditionally issued bonds supported by revenue from assets like credit-card receivables or loans for cars and houses. More esoteric securities are backed by timeshare payments or royalty fees for popular songs. The use of sub-prime mortgages as collateral for bonds gave rise to a crash that triggered the 2008 global economic crisis.

Securitization is one of several new financing arrangements for solar projects that Citigroup is seeking to develop, said Marshal Salant, managing director of Citigroup Global Markets.

Securitization may eventually become a cheaper source of capital than borrowing from banks or selling equity stakes in projects in exchange for tax breaks, the most common types of financing used by rooftop solar companies.

Securitization ‘Inevitable’

San Francisco-based SunRun, SolarCity of San Mateo and Sungevity Inc. of Oakland, California’s largest rooftop solar companies, have signed thousands of contracts with U.S. homeowners and commercial customers. The monthly payments are well-suited for being bundled together into a single, securitized asset, said Jonathan Bass, a SolarCity spokesman.

“Securitization is inevitable in solar,” Bass said in an e-mail, though SolarCity isn’t planning any such deals now. “When you can offer solar electricity at a discount to utility rates, you have a cash flow that is more predictable than mortgage or car payments.”

The payments “look an awful lot like other pools of consumer receivables or commercial assets that we have securitized in different venues,” said Russell Burns, managing director of asset finance, at Credit Suisse Securities USA.

Credit Suisse is seeking to develop solar-backed securities, which will offer “a predictable source of liquidity as the industry continues to grow,” he said.

The rooftop solar industry would benefit from a lower cost of capital, which securitization may provide, Danny Kennedy, Sungevity’s president, said in an e-mail. SunRun wouldn’t say whether it plans to securitize its assets.

Large Portfolios

The portfolios of solar contracts have become “large enough to attract investors,” said Anthony Kim, a solar analyst for Bloomberg New Energy Finance.

U.S. residential solar projects may require as much as $1.3 billion in financing this year, according to Kim. If all the contracts for panels installed atop homes last year were securitized, it would generate about $428 million.

Commercial rooftop projects will need about $2.3 billion this year, and securitizing last year’s contracts may provide about $733 million, Kim estimated.

First Bond

One of the first solar-backed securities may be based on contracts between Wal-Mart Stores Inc. (WMT) and SolarCity, Kim said. The retailer agreedin September to buy electricity from systems that SolarCity will install on as many as 60 stores in California. The anticipated revenue from those contracts may be packaged into securities worth about $117 million now, Kim estimated. Wal-Mart plans to have rooftop solar installed at 130 stores in the state by 2014.

The planned solar-backed securities will be based on many small projects already in operation, making them different from the $850 million in bonds Warren Buffett’s MidAmerican Energy Holdings Co. issued in February to finance its $2.4 billion Topaz Solar Farm in California. That debt will support the construction of a single, utility-scale power plant expected to be complete by 2015.

Standard & Poor’s, Moody’s Investors Service and Fitch Ratings, the three main ratings providers, have fielded inquiries from solar companies about evaluating bonds, and none of them have received a complete proposal.

“Real conversations are happening,” said Trevor d’Olier- Lees, a director of the infrastructure and renewables group at S&P. Creating solar securities will carry new types of risk, notably the lack of payment history on the underlying contracts.

“The companies offering those agreements, they’ve only been offering them for five or so years,” d’Olier-Lees said.

Limited History

“You’ve got a combination of limited payment default data, and then you’ve got a duration of the financing that well extends the experience,” d’Olier-Lees said. “How do you project forward and say that payment performance is going to continue for the next 20 years?”

Solar securities may be less risky than bonds backed by mortgages or credit card receivables because consumers will default on other bills before they stop paying for electricity, said Tanguy Serra, president of Vivint Inc.’s solar unit. The Provo, Utah-based home automation company operates security and energy-management systems for homeowners and began installing rooftop solar in October.

“Your home’s electricity is an absolute necessity that comes ahead of everything else. Even if you’re giving up your car, you’re still paying your power bill,” Serra said in an e- mail. “Investing in solar securities is one of the least risky investments you can make.”

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