Rocket ship company SpaceX has been buying up the bulk of SolarCity's new solar bonds. Why?
On occasion celebrity entrepreneur Elon Musk’s three companies —electric car company Tesla, rocket firm SpaceX and solar installer SolarCity — end up working together.
For example, a few years ago Tesla and SolarCity teamed up to offer an early version of a solar panel and battery combo product. Last year a local newspaper reported that SpaceX was working with SolarCity to build a small solar panel farm near the rocket company’s launch site in Texas.
But in recent months SpaceX has stepped in with substantial dollars in a more unusual way. Over the past six months, SpaceX has invested $165 million in a new investment product from SolarCity.
Late last year, SolarCity said it would start selling what it called the first public offering of solar bonds in the U.S. The product gives regular retail investors (investors that don’t need to be accredited) a way to buy solar bonds that are backed by the company’s solar panel systems.
It’s an interesting move by SolarCity because it could give a regular person with some extra cash an easy way to invest in the potentially booming solar panel market and the company’s future growth. Previously solar investors have been mostly big banks, power companies, or even corporations like Google.
With SolarCity’s bond product, retail investors can buy the bonds directly from SolarCity online, or through IRA accounts or brokerages. Startups like Solar Mosaic have tried selling financial products on a smaller scale with mixed results.
SolarCity’s solar bonds have various rates of return, depending on how many years the bond takes to mature. The longer the term, the more money an investor can make back. SolarCity currently offers one, two, three, five, ten and fifteen-year bonds — you buy the fifteen-year bond, you get the highest rate of return, but you have to wait that long to take the money out.
But the bulk of the bonds haven’t been sold to these small “six-figure” investors, but to a related corporate company.
SolarCity started off offering $200 million worth of these bonds in October 2014. Now as of the end of SolarCity’s second quarter (earnings were announced a week ago, Wednesday), SolarCity had $202 million worth of solar bond debt outstanding. Roughly $165 million of that was to sister company SpaceX.
In March, SpaceX bought $90 million of the solar bonds due in March 2016, followed by another $75 million of the bonds, due in June 2016. SpaceX purchased the shortest, one-year term bonds so it will be able to sell the bonds next year if it wants the cash out. It’s a relatively liquid position, with the smallest rate of return.
So why is SpaceX buying these up? According to SolarCity’s Vice President of Financial Products, Tim Newell, the answer is “very straight forward.” The bonds offered SpaceX an attractive rate of return for a one-year investment compared to other investment options out there. SpaceX carriers a fair amount of cash at times, noted Newell, and the company wanted to put that cash to work in the short term with a high degree of reliability.
However, given the Elon Musk connection between SpaceX and SolarCity there could be another answer. Because SolarCity’s solar bonds are a pretty new idea, SpaceX jumping in could be useful to give more confidence to regular investors that might have been hesitant to buy them.
As Angelo Zino, equity analyst with S&P Capital IQ, explained it: “The market there is unproven. There’s more uncertainty because the market hasn’t matured as much as with other industries. If potential investors are uncertain how it works or if it makes sense, this is Elon Musk backing the bonds.” Musk is the chairman of SolarCity and a major investor in the company. At SpaceX, Musk is the CEO and major backer.
To that suggestion, Newell says: “It was great that SpaceX invested. The decision was based around SpaceX’s financing needs and the fact that solar bonds served their needs.”
Newell says that because of SpaceX’s interest in the bonds, the company is considering launching a solar bond product that is geared more for corporate investors and could be shorter in term. Companies could take out their funds on a quarterly basis, instead of the yearly basis.
Newell says the amount of non-SpaceX investors that are buying the solar bonds is also growing. For example, RSF Social Finance, recently invested $9 million into the bonds through a cash reserve account that holds donor advised funds awaiting grant-making. RSF says it had limited options to invest such cash in the past.
Despite that the bonds can be attractive to companies and retail investors, SpaceX’s bond purchase is still somewhat unusual given the space company is a venture capital-backed startup with its own large expenses and high-risk plans. One of SpaceX’s rockets exploded at the end of June, which has only added expenses and volatility to the company. And of course, the deal also stands out just because Elon Musk is the CEO of one company and the Chairman of the other.