SolarCity's Acquisition Of Common Assets Is A Warning Sign

There is no way to think of SolarCitys (Nasdaq: SCTY) acquisition (or in reality this is what in the Digital Media Technology Segment we call an Acqui-hiring - they are purchasing Common Assets LLC, for the assets SolarCity receives. Primarily, SolarCity is receiving the companys two employees - Tim Newell, the president and chief executive officer of Common Assets, and John Witchel, Common Assets chief architect. They also receive the investment platform SolarCity will use to distribute its investment products. Newell, who will serve as SolarCitys vice president of financial products, brings more than 25 years of investment, technology and government experience, including roles as senior advisor to private equity firm US Renewables Group; managing director of venture capital firm Draper Fisher Jurvetsons clean technology affiliate fund; managing director and head of investment banking for E*Trades investment banking affiliate, E*Offering; and head of investment bank Robertson Stephens financial technology group. Witchel, who will serve as SolarCitys senior technology architect for financial products, is an experienced technology executive and successful entrepreneur with experience in large-scale financial innovation. Notably, Witchel was co-founder and chief technology officer of Prosper Marketplace, where he oversaw design and development of the first person-to-person online lending marketplace in the U.S. Common Assets was backed by U.S. Renewables Group (USRG), a private equity firm that specializes in renewable energy investments, and Jim McDermott, managing partner of USRG, served as chairman of Common Assets prior to the acquisition. This would all sound like on the surface a small positive transaction on SolarCitys part, whose shares have been on a tear lately (shares in SolarCity (Nasdaq: SCTY) have performed ridiculously well -soaring roughly 400% since its December 2012 initial public offering), of which I have been in and out of (currently I am not in - nor do have ANY plans of jumping back in). As I saw the news cross my Bloomberg Terminal as I was sitting at my Trading Workstation last Wednesday late in the afternoon, I groaned. I had been in very sensitive meetings all day Wednesday from 10AM until just after the markets closed here in New York City. It was the kind of lock-down meeting where literally everyone's phones were collected in a basket and the 12 of us were cut off for better or worse from the financial world that day. So I never even saw the seemingly innocuous deal regarding this SolarCity acquisition until after the close of trading. and to the uninitiated this seems like a glowing press release, pretty big news for SolarCity - potentially billions of dollars in the near future in securitization transactions could be flowing from this new online marketplace for a new type of Asset Backed Security - Solar Asset Back Securities (SABS). Indeed, most news outlets took the news release from SolarCity and turned it into some type of exciting victory for SolarCity. Why did I groan? Lets take a look at the reality of what this acquisition truly means to SolarCity, based on a lot of personal and gathered experience on the securitization of Solar Asset Backed Securities, which

the industry has found (as I did over six years ago when I started a over four-year effort at getting securitizations done on a wide scale - we did actually get a couple deals done but these were with private investors and frankly close relationships of mine to boot, and we never got over $100 million total) over the past several years. But lets step back and take a look at this deal from a number of angles, including my in-depth report on the The Devil In The Details of Solar Securitization Unlike Solar Mosaic, which is a crowdfunding model that allows Retail Investors to invest directly into specific Distributed Solar Energy Projects, SolarCity plans to offer debt-based investments, backed by its mixed asset portfolio, he said. Solar Mosaic had strong success since last year, selling out its first four projects within 24 hours. And even though Solar Mosaic has the advantage of larger projects and communities to build support for a particular project, they has raised a very small amount of capital, especially when compared to what SolarCity is trying to accomplish. Having worked with dozens of Solar Developers across North America since late 2008, I have been watching SolarCity's progress over the past several years with a high level of interest. As most everyone that is familiar with the Distributed Solar Development Segment knows (Distributed Solar = Individual Grid-Tied Residential and Commercial Solar Systems), SolarCity has quickly evolved into what is in reality a Distributed Solar Financing Firm, as opposed to being anything close to a Solar Panel Manufacturer (a common misconception in the marketplace). There is the argument out there - tenuous at best - is that they are actually in the energy generation business, utilizing various forms of financing to get these distributed, end-user residential and (some) commercial projects financed in order to produce the energy guarenteed to the end-user contractually, selling the rest off to the utilities via their grid-tied feed-in tariffs.This is not a profitable or viable longterm (at least as long as I model long-term in this industry - five years) option for high-revenue growth or profitability. This isnt even a Industry Segment Id want to be associated with - utilities continue to cut back on their feed-in tariffs because of simply economics, the same reason State and soon Federal subsidies (like the 2017 expiration of the 30% Tax Credit) are pulling back as well - simple economics. No, SolarCity is at its heart a Distributed Solar Financing Firm, and there is nothing wrong with that the financiers are ultimately going to make the largest profits in the Distributed Solar Segment. I applaud their strategy here, as I applauded when they became the first to truly securitize a batch of their residential solar leases a few months ago. That was a big first step in getting Distributed Solar Financing to become a common ABS, or Asset Backed Security (the buzzword right now is Solar Asset Backed Security, or SABS). My biggest problem is all the hoopla over what is just another crowdfunding platform that somehow magically will produce soon billions of dollars in transactions as the Retail Investor can go online to this new SolarCity Financing Platform and buy these Asset Backed Securities (they are essentially bonds issued from a SPV, or Special Purpose Vehicle, which purchases from SolarCity the rights to a bundled stream of payments generated from these residential and commercial solar system leases - securitization, which has been done

More Than A New Funding Platform - Its About Creating a New Asset Class
Although crowdfunding as a phenomenon is growing fast, it is not yet clear whether SolarCity will be

able to generate much capital via this method with this Solar ABS Debt Security product. To date, crowdfunding has worked when the sponsors have been able to generate excitement for a specific product, solution or project. The excitement is typically whipped up via a strategic combination of viral marketing via social media, the right Industry Blogger to cover it, and finally making its way into the more mainstream Online Financial Publishers. It is not clear how that translates to SolarCity - they're going to have to get people excited about the "Cause" (or far more likely based on my years in the financing portion of the Distributed Solar Industry The Returns) because there's going to be practically no excitement around any given individual house. These are bonds (debt) being offered via a crowdfunding platform of some type (if we look back at Witchels work, this will be very much an emotive play for consumers to participate in the Solar Revolution - and from personal experience even several years ago when Solar was HOT, the bottom line to over 90% of consumers was, Show me the money. It was almost all return-on-investment driven - from the End-Users to the Investors to the Developers, Installers and most definitely the financiers. Even SolarMosaic has the advantage of larger projects and communities to build support for that project, has raised a pretty small potato amount of capital, in the grand scheme of things. So this is going to be a lot more about creating and publicizing a new asset class, rather than following the established crowdfunding playbook.

Securitizing Solar Leases is Hard

During the fourth quarter of 2008, I woke up with an epiphany. I had been working with several large Solar Developers that were in their first couple of years of operations - essentially they were Startups, but most of them were external divisions or subsidiary companies of large well established Energy Industry companies - large Electrical Contractors that work with the major residential and commercial developers across several Southwest States, even larger Electrical Equipment Distributors that were the primary suppliers of the massive amounts of electrical equipment needed to completely wire a 1,000 home residential development in North Scottsdale, AZ (the Greater Phoenix Metro Area) or a brand new large commercial office park development near the Ontario, CA Airport (Greater Los Angeles Metro Area). I have been working with some of the best, biggest, and brightest Financial Industry Companies as well as Individuals from the specialized world of Financing that involves esoteric new technology products and securitization on an idea we introduced to several exclusive Financial Industry Firms that I pushed as hard as humanly possibly, utilizing end-users (the party actually making the payments) with the highest, investment-grade credit (we were dealing with large commercial projects - think the United States Government, Indian Reservations with perfect bond repayment history, corporations like Kellogg's, Tyson Foods, even the YMCA with government backing. The problem was dealing with more than a dozen of developers across several states - nothing was standardized, first off. The second is the problem of the valuation of these systems in 5, 10, 20 years - with technology jumping exponentially across just about every single segment in the Tech Industry (interestingly, Solar is really not one of those technologies making exponential technological leaps and bounds, there is no Moores Law as there has been with Personal Computer (PC) chipmakers when it comes to solar panel manufacturers.no doubt a ton of progress has been made but not on that torrid level we saw with PCs and we are now seeing with Mobile Devices, for example)

The Devil is in the Details of Solar Securitization

SolarCity has actually done this many times in past for me - perfectly timed an event, acquisition or news story perfectly to augment mine or in this case vice-versa - my article for Seeking Alpha, The Devil In The Details of Solar Securitization, breaks down in much greater detail this short summary of the article Ive included below here for the purposes of understanding what SolarCity is up against. First, however, one thing I had never imagined Id need to consider yet is Securitization Products like a Solar Asset-Backed Security (SABS). At SolVentus Capital, Inc., a Distributed Solar Financing Firm that worked with both Residential and Commercial Solar System Financing, I was able to dig very deep and put together almost $2 billion in SABS for 13 Southwestern US Solar Developers that had signed and approved leases with roughly 65 projects, all Commercial Solar Systems with an average system cost of $3,076,920. However, all things not being equal in this world, we had a variety of Commercial Solar Systems in terms of System Size, Geographic locations, roof mounted and ground-mounted systems as well as over a dozen Carport Solar System Deployments. But in reality, I had to spend months with thirteen Solar Developers based in nine different cities in four states: Phoenix, AZ, Tucson, AZ, Denver, CO, Los Angeles, CA, Ontario, CA, San Diego, CA, Scottsdale, AZ, Las Vegas, NV, and Lake Havasu City, AZ. The 65 Commercial Solar Projects were being developed by 13 different developers in 28 different cities across four states, all in the Southwestern United States. So, I ensured geographically that all the projects were clustered together - a huge problem I knew from day one I had inherited from the previous group and financiers, who had waster four long months as the developers saw 17 projects either get canceled or were simple picked up by another developer - a developer with access to financing then and there.* It had taken us 42 days, or just over a month, to first pitch our financing services to these thirteen recently burned developers who had just watched a total of 17 projects between them break their contracts after 47 months of waiting for the financing. Those 17 projects were worth a total of $42,756,173. The hardest hit: a Denver, CO based Solar Developer, who lost 11 projects worth $27,665,759. Remember, these were ALL projects where the first financing syndicate simply could not get their capital sources in order it sounds like throughout the project planning phase, but never communicated this to the 8 developers they at worked with. Rather, they continued to pitch it sounds like from my internal source their entire rolodex of Institutional Investors, Commercial Lenders, Banks, Private Equity Firms, even over a dozen Venture Capital Firms surely in complete desperation and after too many martinis, as Venture Capital Firms dont touch 20-year long large project financing at a lower-than-needed interest rate. VC Firms want 20% IRR (Internal Rate of Return)