6degrees AstroBlog
Citizenre Announces Legal, Financial Teams
By Irwin Horowitz, 8-21-07
As many of my readers know, I am an Independent Ecopreneur for a new startup company called Citizenre. This company plans to market solar photovoltaic systems to homeowners nationwide using a contracted rental model similar to what is used by the cell phone and satellite television industries. Rather than assuming the upfront capital investment, our customers will only be asked for an affordable security deposit just prior to their installation and to pay a monthly fee based on their rates and the amount of electricity their system produces. Contracts can be chosen from a 1-year, 5-year or 25-year term, with their rate locked in and guaranteed for the entire length.
Yesterday, the company announced some of the details regarding the composition of its financial and legal teams. This is the first in a series of press releases that will be forthcoming over the next few months culminating with the announcement of the location of the manufacturing facility and the identities of the financial institutions providing the necessary funding for this venture. The highlights of today’s announcement are that Ronald S. Borod and Jonathan C. Black of Brown Rudnick Berlack Israels LLP are serving as special counsel to Citizenre and are assisting in securing the major funding for the manufacturing facility. Also, Douglas R. Grossinger and Mark Lundquist of Structured Growth Partners will assist in raising capital and in structuring power purchase agreements for the company. Lastly, Anthony Dixon will serve as a senior advisor to the company’s finance team. He has most recently served as Managing Director in the Financial Institutions Debt Capital Markets group for Citigroup in London.
On a semi-unrelated note, last week Citizenre had its first beta installation of a system in southern California. The installation was recorded for broadcast later this season on Ed Begley Jr.’s “Living With Ed” show on HGTV. Since the manufacturing facility is not yet online, the installation employed off-the-shelf components. It should still serve as a useful test bed for our systems. Once broadcast, it should provide our customers with a realistic understanding of what to expect when they have their systems installed in the near future.
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Comments
I would say the most serious concern is over financing. Given what has happened in the credit markets, Citizenre's inability to obtain financing when credit was easy, how are they going to do it now that the credit market has hardened?
From the PESN web link:
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There are four major vulnerabilities to Citizenre in this credit crunch:
A) Customer Credit Worthiness Risk: Since no customers have completed credit checks, we don't know what percentage of them have prime credit. A significant portion of the 19,700+ customers may not have acceptable credit scores and their FRAs may not be financeable.
B) Interest Rate Risk: If Citizenre has to pay higher interest rates, their margins will decrease, making the service uneconomic for them to offer in some locations. This means that they either a) have to raise the rates they charge (which could make the KWH cost of electricity higher for their customers than they pay their utilities) and/or b) have to exit certain markets - particularly those with low interest rates. Again, a large percentage of customers could be lost if entire states have to be abandoned or if Citizenre is forced to change the rates promised.
C) Geographic Risk: Lenders may avoid investing in asset-backed security loans from certain regions that are particularly hard hit by real estate mortgage foreclosures. 50% of the sub-prime mortgages in the past three years were issued in California and Florida. Unfortunately, California is the most attractive solar market in the country (~80% of the US solar market).
D) Contract Language Risk: Lenders may object to certain terms in the FRA contract and require changes. The financing term has the greatest impact on the economics of FRAs. If lenders require shorter terms (e.g. 5 to 7 years, instead of 25 years), Citizenre cannot offer FRAs at their current rates.
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A startup company without a stable capital base doesn't seem to have odds in its favor. But if it were easy anyone could do it. Good luck!
The simple response to your post is that the author of these comments, Dr. Richard George, has had a contentious relationship with Citizenre ever since he quit back in April. But that doesn't really address the issues he raised in his letter. Truth be told, I am no expert in financial areas, and prefer to leave such analyses to those who are experts. The only truthful response that I am able to give to these comments is that only time will tell. Either Citizenre will succeed despite the concerns Dr. George has raised, or it will fail because of them or due to other issues.
I would prefer to remain cautiously optimistic in this regards. I am not aggressively signing up customers at this point (though if someone wanted to sign up, I wouldn't turn them away :-). I will await two things before I start pushing this concept more:
1) the press release announcing our financial backers and the location of the manufacturing plant; and
2) the opening of the market here in Idaho, where we can't currently sign up customers due to our very low power rates (below the breakeven point for our ReNU rental system).
For the second issue, I am hopeful that once the press release has been made and the company fully staffs their main HQ, that they will implement some system whereby we can sign up interested homeowners at that breakeven point, even if it is currently more expensive than their grid power (and we'd only be talking about 10-20% higher I think).
Here is the relevant information from the corporate "knowledge base":
What happens to the panels if our company goes bankrupt before the 25 yr contract is up?
The systems are financed through project financing. Therefore, if Citizenrē goes bankrupt, the systems will not be effected. The special purpose vehicle (SPV, a legal company incorporated to do one thing, and that is rent systems to a pool of customers) will continue to rent the systems to the customers. The assets have a very low debt-to-equity ratio, as well as a high debt service coverage ratio, not to mention a debt service reserve account. So it is unlikely that the SPV will go bankrupt itself. It would require nearly 50% of the rental pool to stop paying their bills for over six months - all at once.
In relation to maintenance, the franchisees are also separate entities. The franchisees have separate maintenance agreements with the SPV that are fully funded from the onset. The only possible issue would be if the franchisee went bankrupt. At which point the company would likely bail the franchisee out and take over operation. Of course, all business is subject to events and market conditions that are out of the control of the business. This leaves the door open to possible bankruptcy and correspondingly disruption in service.
Nevertheless, the worst that could happen is that the asset would sit on the roof of the customer for an extended period of time without charge or penalty to the customer. In effect giving the customer energy for free. In this scenario, I do see the bankruptcy court selling off the assets to another owner for pennies on the dollar. It would then be the obligation of the new owner to either recover the system or negotiate a new deal with the customer.