Some folks don’t like it when I write about investments that aren’t low-cost index funds. The thing is, when I find something intriguing, I like to dig deeper and then keep a record my findings. That way I can look back later and see how things turned out and compare with my opinions at the time. Just because I write about something doesn’t mean I recommend it, you have to read the entire post.
SolarCity is a company that installs and finances solar panels on commercial and residential properties. Back in October 2014, they started to allow individual investors to buy senior, unsecured corporate bonds directly from them online. You could invest as little as $1,000 in these SolarCity SolarBonds and pay no trade commissions or fees. The critical feature is that these “solar bonds” were backed only by the claims-paying abilities of the issuing company. If SolarCity fails, then you could lose your entire principal as well as any interest owed.
In general, the more confident you are that you’ll be paid back, the lower the interest rate the borrower has to pay. Other factors will come into play, such as the overall interest rate environment. With this in mind, check out the history of these bonds:
- In 2014, SolarCity was issuing 7-year bonds paying a 4% annual interest rate.
- In mid-2015, SolarCity was issuing 5-year bonds paying a 5% annual interest rate.
- Currently in August 2016, SolarCity is offering a 18-month bond paying 6.5% annual interest rate. Ends August 30, 2016.
Supposedly, SolarCity is passing on the savings of doing things in-house and not having to pay investment banker fees. I still declined to write about these SolarCity bonds in the past because the yield and term lengths were not good enough to grab my interest. But 6.5% in 18 months? Okay, you’ve at least gotten my attention.
Consider that as of 8/24/16, an 18-month Treasury bill yields approximately 0.70%. The highest 18-month FDIC-insured CD pays roughly 1.35%. Investment-grade (A) corporate bonds are averaging ~1.15% for a 2 year maturity. Even a junk bond ETF like JNK may have a 6.5% yield but an average maturity of over 6 years.
What’s happening? Well, SolarCity is struggling in several areas. It’s been losing money reliably, every year. Here’s the stock price chart:
Perhaps more importantly, it has some big bills that are coming due soon. According to this TheStreet article, SolarCity has $3.25 billion in debt, with $1.23 billion due by the end of 2017. Note that date. At the same time, Tesla has offered to buy SolarCity in an all-stock deal.
Why would they buy these bonds? My wild-guess opinion is that it looks like SolarCity is trying to extend its debt long enough so that Tesla can safely buy the company and then refinance things on better terms. I would say that if the deal closes, then these 6.5% bonds will pay off. I believe that Tesla will still be around in 18 months. However, if the deal doesn’t close for some reason, then SolarCity might be in big trouble.
Are these 6.5% bonds worth the risk? Given that Elon Musk and his cousins are a big shareholder in both companies and just bought $100 million of these bonds, that would seem to place your interest in line with theirs at this point. I’d actually rather hold these bonds for 18 months than be a shareholder for 18 months. However, you are still faced with the chance that the deal will hit some unforeseen obstacle, so it all depends on your confidence level. For me, the reward just isn’t high enough to justify the risk of permanent principal loss (I’d rather have a house as collateral), so I am going to pass and wait to see how it turns out.