Head of the class: SunPower gets an ‘A’ on $440 million solar portfolio

The Kroll Bond Rating Agency delivered an Investment Grade preliminary rating on a SunPower residential lease portfolio of 317 MW. The P50 and P90 ratings after 20 years were projected near 90%, and 73-80%, respectively.

November 6, 2018 John Fitzgerald Weaver

SunPower modules; Department of Energy

The cash must flow.

SunPower is seeking $440 million for a portfolio of residential solar leases, and it just got a rating that makes its odds look good. The Kroll Bond Rating Agency (KBRA) has given the portfolio of 37,568 contracts a preliminary rating of “A”. The contract terms have an average of 207 months left of the original 240 months. Approximately 0.26% of the portfolio is more than 120 days past due, with the average weighted FICO score being 753.

In building the ratings out, there were a few items areas that weren’t positively rated.

The first minus is that the solar lease business model hasn’t been fully tested by a complete economic cycle, and with the limited performance data available, forecasts must be used. KBRA notes that business models within the industry are still evolving. The second item, a ‘+/-‘, was risk associated with the tax credits and how the IRS might define the fair market value of residential solar systems as this transaction progresses through the anticipated flip dates. It is noted that insurance has been taken out to protect against the risk.

A third item, this is a ‘-/+’ was given to the risk of payout due to higher than warranted solar module degradation. Seemingly contradictory, KBRA notes that its ‘A’ rating is based on a projected degradation of 1.02%/annum, while they project that SunPower’s degradation value will be 0.25%. This means KBRA sees potential for upside here.

Another minus was that the portfolio is 2/3 California, and that 92% comes from California plus Arizona and Nevada. A additional minus rating was that solar modules are tough to collect if someone stops paying bills, unlike a car.

The portfolio, per the Wikipedia Bond Rating chart, is rated right in the middle of Investment Grade product.

The transaction diagram give a glimpse into the complexity of documentation that must follow the money. There were thirteen unique funding partnerships through the years that this portfolio was developed, and of course not shown are the hundreds of local project originators that SunPower partners with.

Market experience with residential solar power is growing. SunRun, Tesla, Sunnova, Dividend Finance, and others have all been able to successful put financial products into the marketplace. There is also significant investment growth on the top side of project sizes – with European investment houses putting down construction money in Texas, conservative investors from pension funds taking passive ownership in large projects, and investment partners going levels deeper into solar relationships after experience.

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