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SolarCity’s Solar Bonds—are they worth it?

You may have seen ads like the one above in your Facebook feed, on TV, or on one of your favorite websites. SolarCity, the popular solar leasing company, is offering Solar Bonds for sale, with returns of up to 5.75% and a low minimum investment. Solar Bonds make it easy for anyone, including renters and lower-income folks, to take advantage of the investment potential of solar power. Or at least that’s what SolarCity says.

We’re solar geeks, so we know the awesome financial power of a solar installation. We’re dedicated to helping homeowners across the country understand the challenges and opportunities of going solar in their state, and our interest is piqued whenever we hear of a new opportunity to take advantage of the sun’s bounty, whether it’s for environmental, social, or financial reasons.

So we came up with a few questions about SolarCity’s new Solar Bonds, and we set out to find good answers. Here’s what we came up with:

What’s a bond?

A bond is essentially debt, so an investment in bonds is essentially a loan. The organization issuing the bond needs money to operate or pursue a specific project, and investors give them money in exchange for a promise of repayment with interest after a defined term.

One of the most widely known kinds of bonds is a government bond, such as a U.S. Savings Bond. You essentially give them government a loan, and they agree to pay you back with interest after 10 or 15 years. A U.S. Government bond is a very secure investment that yields very low interest. Another kind of government bond is called a municipal bond, which is offered as a way to pay for local government undertakings like infrastructure improvements or major building projects.

Some bonds are backed by collateral, in the form of a physical asset. Other kinds of bonds are insured by FDIC, just like deposits made to a traditional bank account. The kind of bond we’re talking about here is called an unsecured bond, because it isn’t backed by any kind of collateral and isn’t insured against loss. That risk means the bond’s interest rates are higher than more secure investments, which can lead to bigger returns over time.

What’s a Solar Bond?

That’s just the name SolarCity gives to its bond offering. The returns the company pays on the bond come from the income generated by its solar leasing program. It’s a little bit of marketing to show how their bonds are more socially or environmentally responsible than other investments.

Solar bonds are simply unsecured notes issued by SolarCity through an investment partner. They can be purchased directly from SolarCity at its website or they can be purchased through your regular investment brokerage firm.

What does SolarCity get from offering the bonds?

SolarCity plans to use the money to fund expansion of its business, which mostly consists of installing leased solar panel systems on roofs around the country and collecting payments from the owners of the homes on which the panels are installed.

The company currently has over $3 Billion in contracted lease payments scheduled to come in, so they’re selling these bonds with the idea that they’ll be paid back by the lease income, and they’ll use the money to expand operations.

Are Solar Bonds a good deal?

The minimum investment that can be made in SolarCity bonds is $1,000, and the minimum term is 1 year, up to a maximum of 15 years. As of this writing, the interest rate on these bonds is between 2.0% and 5.75%, depending on the term length.

The interest payments are generally made twice a year, so if you invest $1,000 for 15 years, you’ll get two yearly payments of $28.75 every year. This is similar to how the returns for municipal bonds work. Because the interest isn’t reinvested, it’s a simple annual payment over the life of the bond.

Let’s take a look at how SolarCity says the rates for Solar Bonds compare to other investments:

As you can see, the SolarCity bonds have returns considerably higher than other types of fixed-rate investments. U.S. Savings bonds have a 30-year interest rate based on the previous year’s rate of inflation and 5-year CDs have rates based on the prime rate, so neither are particularly high-yield these days. Municipal bonds are a bit more risky, and therefore offer a little better interest rate.

Investing in a growing business like SolarCity means that you can expect high returns compared to traditional investment vehicles, but it also means you take on some additional risk.

How do Solar Bonds compare to an investment in home solar power?

Now here’s an interesting question. We’ve studied the potential returns on a solar investment in all 50 states, so we can compare Solar Bonds with returns from around the country.

It isn’t exactly an apples-to-apples comparison, because when you put solar panels on your home, you’re investing in a physical asset that produces electricity, which you use for your own needs and/or sell to the electric utility, while an investment in Solar Bonds is the purchase of an intangible debt obligation.

In a good state for solar, like Connecticut, a home solar system requires a first-year investment of about $9,500. Over the 25-year life of the system, you end up with almost $26,000 in income from electricity savings. That’s a huge chunk of money, and it represents a rate of return of 12.2%! Check out how that looks compared to Solar Bonds and a home solar lease:

Taking that same $9,500 and investing it in solar bonds for 15 years would mean a dividend of about $540 each year, and if you reinvest in year 15, you end up with about $13,500 in profits over the same 25 years as the solar installation. Not bad. The interesting thing to look at above is the lease. Over 20 years, you can save $11,400 in electricity costs with a solar lease, without putting any money down.

An investment in home solar means you take on some risk when it comes to fluctuations in electricity prices and future equipment replacement, and it can be complex, with permitting, system design, and more factors to consider (most of which should be taken care of by your installer). But, as you can see, it can also result in some amazing rates of return, and the benefits to the natural environment are direct and profound.

An investment in Solar Bonds, on the other hand is as easy as a conversation with your broker, or as clicking a few buttons, if you buy online. The returns are respectable and fixed, and the length of the term is well-defined. The minimum investment is only $1,000, which makes it easier for more people to get involved.

Here’s an interesting note: It turns out that a 15-year investment in Solar Bonds has a better rate of return than an actual solar panel system in 8 states. So if you live in Alabama, Idaho, North Dakota, Oklahoma, South Dakota, Virginia, West Virginia, or Wyoming, and you want a pretty safe investment in solar, you should definitely check out SolarCity’s Solar Bonds.

Are Solar Bonds a safe investment?

That’s the big question. We’ve long written about the economics of home solar in America, and the potential returns homeowners can see just from installing their own systems. In solar-happy states, rates of return can be anywhere from 12% to 40% over the 25-year life of the system.

Compared with the maximum 5.75% return for a 15-year Solar Bond, those rates are astonishing. The risk is still there, because owning an expensive physical asset is a little risky by nature, by the potential returns are huge.

That’s why SolarCity feels confident that it can offer these great rates. They haven’t been around long, but they’ve been really successful, currently valued at over $5 Billion. Their business model is predicated on having ongoing income from leases, so they can pretty accurately predict the minimum income they’ll see for the next 15 or 20 years, and they’ll use money from bond sales to ensure they stay ahead of the curve, reducing costs and ensuring more income.

Finally, and we’re not saying this is a huge endorsement, but Elon Musk’s aerospace company, SpaceX, just purchased $90 Million of SolarCity’s Solar Bonds. Mr. Musk is also one of SolarCity’s biggest investors, and the Chairman of its board. Whether or not that sets off any alarm bells in your head, it’s a huge investment that promises a strong return, so it will likely benefit both companies.

What happens if the company goes bankrupt?

That’s actually not as bad as it might seem. Because of the way bankruptcy laws work, bond holders are some of the first entities to be paid back when a company fails. And they have a good chance of seeing at least some of their investment returned to them.

But again, investing in bonds isn’t without risk. In Chapter 7 bankruptcy, the company’s assets are liquidated, and the proceeds are distributed in order of their priority. In Chapter 11 bankruptcy, the company seeks to reorganize and continue to operate, and is likely to default on bond interest payments, and the value of the bonds can be severely reduced, until such time as the company comes out of bankruptcy.

Are any other solar companies issuing retail bonds?

Mosaic Solar offers something similar, which allows people to directly invest in projects, and then get paid back with interest. Because it’s tied to specific projects, it’s not always available to people in every state, but you can go to Mosaic’s site and sign up to see whether there are currently any investment opportunities in your area.

There are other ways of investing in solar, with varying risks and rates of return. Some of them involve buying the production of a panel or panels to offset your own usage, and some of them involve investing directly in specific projects. They’re too numerous to list here, so we’ll be writing another post about them really soon. Check back in a few weeks to see it.

Do other energy companies issue bonds?

Yes, selling bonds to finance energy exploration and production is a time-honored tradition, and it comes with its own high-risk, high-reward market. Recent headlines about energy company bonds look something like this:

Those articles might have your head spinning, but here’s a little comfort if you’re thinking Solar Bonds might be as risky as oil: solar installation prices are steadily decreasing, and lease income is not going away.

Oil companies are nearly always at great risk, because the price of oil fluctuates on a minute-by-minute basis, and the market is controlled by the largest producers, who, as we’ve recently seen, can force huge price drops just by opening their pipelines a little wider. Solar, on the other hand, is not subject to those kinds of fluctuations. The sun isn’t going anywhere for about the next 5 billion years, the costs of building solar installations have been steadily decreasing for decades, and SolarCity has billions of dollars in leasing contracts that ensure a stable income stream for years to come.

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6 thoughts on “SolarCity’s Solar Bonds—are they worth it?

  1. Jill says:

    I just skimmed the prospectus. These bonds are not pari passu (of equivalent rank) with Solar City’s other unsecured debt. Additionally, Solar City can default on these securities without causing its bonds to accelerate into default or trigger a bankruptcy proceeding. I like clean energy and was eager to consider this investment but the lack of legal protection here is quite off-putting. Please read the prospectus and discuss with your financial advisor. My guess is that these unrated securities would not make an investment grade rating given their legal provisions.

  2. Madanan says:

    I am from Malaysia. I am interested in initiating Solar Projects in Malaysia and Asia. Please let me know if there is a possibility of us working together in the near future.

  3. Ariaty says:

    Is the solar bond that sell by solar bond capital sdn bhd ( Malaysia Company) is the same bond that provife by solar city

  4. Ariaty says:

    Do Solar Bond Capital Sdn Bhd is the subsidiary company to Solar City Solar Bond

  5. Reuben says:

    But these aren’t actually bonds. Certificate holders are the second-last in line, not the first in this case. These are not insured bonds.

  6. Stephen says:

    Interested in solar and looking at my options

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