SolarCity's (SCTY) Latest Equity Raise Comes with Better, But Not Optimal, Economics - Needham & Company
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Needham & Company affirms SolarCity Corp. (Nasdaq: SCTY) with a Hold rating following the company's recent equity raise.
The firm commented today,
SCTY has the ability to raise capital despite investor fears, but the funding gap remains a risk. This announcement highlights SCTY's ability to raise capital needed to finance its project development. Recall mgmt noted delays in asset financing in 2Q16 given the pending acquisition by TSLA causing cash burn and low cash of $146MM exiting the quarter. Year to date, we estimate SCTY has raised ~$2.0B in aggregate asset financing, representing 64-71% of the costs needed to reach its 2016 installation target of 0.9-1.0GW. Even if SCTY plans to sell a greater portion of its 2016 installation, with less than 4 months until year end, we believe SCTY needs to raise additional capital at a faster pace than currently, potentially through direct sale of systems, cash equity, solar bonds, securitization, SRECs, term loans, etc., in order to meet its target.
Cost of capital is better than the first transaction, but still higher than assumptions. Per the press release, the cash equity/debt transaction represented a pre-tax weighted WACC of 7.4%. While not a direct comparison given the inclusion of debt, this cost of financing is favorable versus the IRR of 8.0%-8.5% for the John Hancock cash equity deal. If we assume that Quantum's investment fund would demand a similar equity IRR of 8.0%+, we estimate that the debt would likely comprise ~20% of the overall total financing at average investment grade corporate bond yields. While the WACC of 7.4% is better than the last transaction, the rate is still higher than mgmt's assumption of 6% used in calculating its PowerCo portfolio value, which would imply a lower NPV of contracted cash flows and less favorable return economics.
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