I answer telemarketing calls. I judge their pitch before telling them I’m not interested.
But the other night I got a call that actually captured my attention. It was an offer to put solar panels on my house for free.
The young lady explained that if my electric bill was typically $200 or higher, her company would install solar panels on my home at no cost to me. This would cut my electric bill by roughly 75%. Of course, part of the savings would be remitted to the solar-panel company.
It turns out my bill is not all that high, so I wasn’t a good candidate for this offer. But it got me thinking, so I did some research.
As it turns out, the Federal Reserve has made this business model possible…
Companies like SolarCity have devised a new scheme for rolling out solar power. They lease the equipment to homeowners, who then make lease payments using a portion of their electric bill savings.
Of course, the tax credits and other incentives go to the solar company as well (thank you, Uncle Sam), but the real meat of this program is in the lease.
SolarCity is not using its own cash to finance this operation of buying solar equipment and then waiting on moms and pops across the nation to pay them $110 per month for the next twenty years.
Instead, SolarCity is bundling up the lease payments these retail clients owe and using it to secure new bonds. The money it receives from issuing bonds replenishes SolarCity’s account, so it is effectively no longer financially reliant on those retail clients.
And who wouldn’t want to wash their hands of retail clients that agree to lease solar panels for decades?
Think of all the things that could go wrong with solar panels over the course of a 20-year lease… a roof needs maintenance, the homeowner moves (at which point they must buy out the lease if they can’t get the new owner to assume it), or the homeowner’s electrical use falls while the lease payment remains the same.
These are just a few of the difficulties I thought of in a couple of minutes of pondering the subject.
Certainly SolarCity has to pay a lot in interest on such bonds, right?
These BBB+ rated bonds (two notches above the breakeven point for investment grade) yield a whopping 4.8%!
Yep, you too can own bonds backed by the 20-year lease payments on solar panels on people’s houses and earn less than 5% on your money.
So SolarCity is able to finance this whole operation for a song, earning a big, fat profit along the way.
On both sides of the coin, there’s only one person to thank for this and that’s Ben Bernanke.
With his foot firmly on the neck of investors as he holds interest rates to historical lows, people are desperate for any yield they can get.
This means that companies like SolarCity can issue bonds at ridiculously low yields given the nature of the investment, and investors will gladly buy them.
It also means that consumers are so desperate to save money – even $30 or $40 per month – that they’ll agree to a 20-year lease. Part of that desperation probably comes from the inability to earn anything at all on modest savings accounts, another gift from the Fed.
I think this is the definition of “malinvestment,” and it bears a striking resemblance to bonds backed by the securitization of rents, which I have discussed before. Investors should stay as far from such bonds as possible. The paltry yield being offered doesn’t come close to justifying the risk of investment.
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Ahead of the Curve with Adam O’Dell
While I agree with Rodney about staying away from risky bonds like those SolarCity have on the market, I think the future of solar is bright.