Yieldcos and Solar Bonds are Real Options for Solar Companies, Raymond James Says

Raymond James analyst Pavel Molchanov took on the red-hot topic of 'Yieldcos' in a recent research report on the solar sector. Molchanov said since solar REITs and MLPs do not seem to be in the cards, yieldcos are the next best thing.

For those unfamiliar with Yieldcos, Molchanov explains them: ."At the risk of stating the obvious, there is no formal structure (for purposes of the U.S. tax code) with that name. It is simply casual lingo for a standard C-corp that, as a matter of policy, pays out a large portion of its earnings in dividends. In contrast to the preferential tax treatment granted by statute to REITs and MLPs, yieldcos are subject to standard corporate taxation (with the objective to maximize benefits of accelerated depreciation)."

The analyst notes there are e currently two U.S.-based examples of renewable power-centric yieldcos: NRG Yield (NYSE: NYLD) and Pattern Energy (the latter dual-listed in Toronto – there is a longer history of yieldcos in Canada). NRG Yield is majority natural gas and also has wind and solar assets. Pattern Energy is entirely wind. NRG Yield trades at a yield of 3.5%, while Pattern Energy is at 4.5%. In the solar space, two project developers – SunEdison (NYSE: SUNE) and Canadian Solar (NASDAQ: CSIQ) – have explicitly laid out plans to spin off yieldcos. Several others, including First Solar (NASDAQ: FSLR) and SunPower (NASDAQ: SPWR), have said they are considering the option.

Molchanov added, "Once a parent company spins off a yieldco, the yieldco's growth strategy will partly be based on "dropdowns" (buying assets from the parent). This, of course, is customary among MLPs; for example, Holly Energy Partners (NYSE: HEP) (parent: HollyFrontier). In addition, yieldcos can buy projects from third-party developers, taking advantage of their lower cost of capital as a high-multiple public entity. In this context, we would not anticipate a flood of yieldco formations, because a limited number of yieldcos can absorb many projects from a variety of solar (and wind) developers."

In addition to yieldcos, Molchanov said solar securitization, or solar bonds, is another alternative to REITs and MLPs. Molchanov said, "Last November, SolarCity took the initial step to “plant the flag” of solar securitization in the U.S. market, issuing $54 million in solar asset-backed notes due in 2026 at a yield of 4.8%. SolarCity’s next securitization, expected to be approximately double the size, is scheduled for 2Q. Concurrently, SunPower has stated that it plans to issue its own U.S. solar bonds later this year, and we would not be surprised to see other residential solar lease providers follow suit over time."

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