Posted on December 18, 2012
Solar City (Ticker: SCTY) is in the news at least partly because last week Goldman Sachs was forced to price the initial public offering (IPO) at $8 per share which was about forty percent below the $13 – $15 price indicated in the original Securities Exchange Commission filing. Since Goldman is the most powerful securities underwriter the IPO price is a major concession.
Although based in Silicon Valley, Solar City does not manufacture electronic components. Instead, it installs photovoltaic panels much like thousands of local electrical contractors around the country. Goldman would have been no more likely to accept Solar City as a client than any such contractor but for two exceptions.
First, Solar’s “financial engineering” is the investment banking equivalent of OxyContin. Ultimately it is every bit as addictive and equally destructive. Specifically, SCTY vigorously promotes lease financing that (1) enables homeowners to avoid a down payment and (2) is structured in a manner to optimize tax and rebate incentives for investors providing the financing. For example, earlier this year Morgan Stanley sold investors $300 million in a fund used to provide such financing. For starters, investors get a 30% Federal tax credit as well as applicable utility rebates authorized by various state and local governments. The conventional interest rate return implicit in any lease is icing on the cake.
Second, Solar City is well connected in Silicon Valley. Elon Musk who was the founder of PayPal and current CEO at Tesla Motors is the Board Chairman. Draper, Fisher leads a group of venture capitalists who invested almost $500 million before the IPO. Read more…