SolarCity’s footprint in the U.S. residential and C&I solar market has grown exponentially since the company was founded in 2006. The company is estimated to have raised more than $1 billion in financing since January. Most recently, SolarCity secured a $500 million financing aggregation facility with Bank of America Merrill Lynch, Credit Suisse and Deutsche Bank (PFR 5/8).
The San Mateo, Calif.-based developer pioneered the first, second and third asset-backed securities tied to rooftop solar. It plans to continue innovating new financial structures under its latest hire, Marco Krapels, senior v.p. of structured finance and strategy. Krapels, who joined the company in March, was formerly a partner at Pegasus Capital Advisors. Previously he was an executive v.p. at Rabobank. In the first instalment of this PFR exclusive, Krapels spoke to Senior Reporter Olivia Feld about SolarCity’s expansion plans and the growth of its asset class.
PFR: Can you please explain your new role? To whom do you report?
Krapels: I’m running structured finance within SolarCity, which is about a 20–person team responsible for funding the growth of the assets the company originates, residential and commercial/industrial solar. The residential portfolio and C&I are growing consistently. The company is roughly doubling every year and that creates a tremendous need to raise capital in the institutional market. That’s what I am responsible for. I report to Brad Buss, who is our CFO.
PFR: You worked with SolarCity in your former roles at Rabobank. Can you tell me about the transactions you worked on and what you learned in the process?
Krapels: We have a long history, not just of transactions but also a friendship, which started really during the financial crisis in 2008-2009, when SolarCity had originated portfolios that it was seeking to leverage with banks. We got our hands around it and thought it would be a great investment for the bank to provide debt leveraging, on top of tax equity, for the residential and C&I portfolios. We liked it because we saw the underlying default ratio as being very attractive.
Once you’ve gone through a financial crisis, and you continue to show a consistent performance of repayment rate at extremely low default rates, you have really proven the model. Utilities have very low default rates as well; people need power. And in our case, people don’t have an economic incentive to default because they are typically able to generate their own power at a lower rate than they would otherwise pay if they were to buy power from the utility. No matter what the financial hardship is, or the offtaker, whatever their financial conditions are, they don’t have an economic incentive to default because we offer power that’s, as we say, better and cheaper.
Having looked at the solar market for some time back in 2008-2009, we said we want to be, from the structured finance perspective, providing leverage to those portfolios. We started that relationship with SolarCity when I was at Rabobank, and subsequently financed other portfolios in the industry. At the time, solar assets were one of the best performing portfolios at the bank. Period. We never experienced a default on any of the loans we made or anyone in the industry we provided credit to in the U.S., and really it was one of our better performing asset classes in the entire bank’s balance sheet. During the financial crisis, it was appreciated that we came in and provided capital at a time when not many were ready to step up to the plate. Since then, it has become a very deep, liquid and broad institutional market that SolarCity successfully developed and led.
SolarCity leads innovation, not just when it comes to solar but really product innovation and financial innovation too.
Lyndon Rive, SolarCity’s ceo and co-founder, myself, and the structured finance group - some of the people that now work with me - did a couple of subsequent transactions as well. We got to know each other, we did some business together and I’ve always kept in touch. I talked to management from time to time and it led to this particular opportunity. I believe they thought I was a suitable candidate and it’s an honor and a pleasure to work with such a capable team and management that is so committed to executing what I think is a very focused strategy that will continue to scale significantly in the years ahead.
PFR: In a few short months, since the start of this year, SolarCity has already raised around $995 million in financing. I appreciate that you just started at the company, but as someone who has been in the industry for quite a bit longer, I’m wondering how you would describe the general financial market for perspective borrowers at the moment.
Krapels: What you’ve seen is that banks have a high level of confidence in our ability to execute and to manage the asset quality within certain limits. I have very high confidence that we will continue to execute in both tax equity and debt in a scalable manner—the size of our transactions has continued to increase over time.
We’re going to see more players come into this category, both in tax equity as well as debt, and we’re going to see existing players step up for larger amounts. We’ve proven that this asset class is of investment grade quality, evidenced by the securitization ratings that we have achieved. We will continue to pursue more liquidity in a market that, whether you’re an institutional investor or long-term institutional or a bank, you’re looking for assets that provide long-term stable, predictable cash flows at extremely low probabilities of default and a yield that is attractive and better than they can get anywhere else on a comparative rating basis. And that’s what we provide. We provide lower risk and higher return.
PFR: SolarCity currently serves 16 states in the U.S. What plans does the company have to expand to other states and countries?
Krapels: SolarCity is a high-growth company. I would say that in the existing markets we are currently focused on, there is no shortage of growth opportunity. But we are keeping our eyes open and we will continue to position for growth above and beyond our current scope.
PFR: Moving on to the lenders you work with, SolarCity has worked with Bank of America Merrill Lynch, Credit Suisse, Goldman Sachs and many other large financial institutions. Why have you chosen to work with these entities and what kind of qualities do you look for when it comes to relationships with lenders?
Krapels: First of all, you are right. We have great relationships with these companies, and many others. What we are looking for is an understanding of our asset class and their ability to grow with us. That’s extremely important. To manage dozens of relationships is very time-consuming so we want people who can grow with us and can step up and do larger transactions over time as we grow. As a company that basically doubles every year, it’s important that you have partners who can grow with you, understand the asset class, and have an appreciation for the nuances within tax equity and debt.
We want people to think out of the box with us. We are a creative company. We don’t just innovate in the product side vis-à-vis our customers in solar and other areas, but we are also innovative on the financing side and we want partners that can be creative with us.
One of the things that I see as a tremendous opportunity is that we’ve done a really good job tapping into the institutional banking market. Fundamentally, I believe this asset class should be a sizeable asset class that should be held by pension funds and insurance companies that are looking for long-term, fixed-rate, low-risk kind of returns. If you really look at the yield curve right now and what’s available now to those long-term fixed institutional investors, there really is not a lot out there. With the help of our banking partners, we’re going to see more demand coming from long-term institutional investors that are looking for yield pick-up relative to risk.
Check back next week for the second instalment of this Q&A with Marco Krapels.