As high-profile solar companies are liquidating, declaring bankruptcy, exiting the market, or being acquired by larger companies, solar project stakeholders are focusing more heavily on assessing the degree of financial risk or “bankability” of a solar energy component provider before choosing them for a project. This applies to anything from the module manufacturer to the installation company, but for inverter manufacturers — providing the brains of the system and some of the necessary ongoing operations and maintenance services — bankability has become an increasingly important metric to be measured up against.
Despite bankability’s importance in determining a project’s financial viability, there isn’t a universal evaluation method available. While there are varying opinions, project stakeholders can objectively assess a company’s bankability with a simple scoring process using six key factors (all publically available): debt to equity ratio, balance sheet strength, profitability, history, transparency and diversification.
If a company doesn’t meet all of the criteria, it doesn’t necessarily imply that a project with their equipment isn’t viable, it means that they bring a higher risk and the cost of debt will likely be higher. Investors might require a higher return or other more strenuous conditions as an offset to the higher risk. Note that the weighting of each factor should be adjusted to suit the risk appetite.
1. Debt to Equity Ratio
A company with a high ratio is typically less flexible to respond to short-term market changes and will not have enough equity to fund long-term objectives. This score follows the standard risk classes scoring methodology with the highest reserved for an A, the lowest for a D and a zero score for negative equity.
2. Balance Sheet Strength
Some professionals equate cash with a strong balance sheet but may not take into account the liabilities that are due over the next twelve months. There are various ways to measure balance sheet strength, but a common one is the short ratio, which compares cash to current liabilities: a ratio of 1.5 means a company has $1.50 in cash for every $1.00 in current liabilities and would achieve the best score. A company with a ratio less than 0.25 would be on the lowest end.
3. Profitability
Taken alone, either of the two factors mentioned above may not be a problem over the short term. However, combining either of the two above with a low profitability score would be a cause for concern. A company that is profitable in each of the most recent four quarters receives the highest score and a company that wasn’t profitable over the same time frame scores a zero.
4. Transparency
Publicly-listed companies receive the highest score, while privately-held companies receive the lowest score as well as for the three factors above. It isn’t that private companies have financial troubles, but because public companies are required to provide audited financial results in the public domain.
5. History
Companies that have been in business longer achieve a higher score because they have tested and proven processes in place, and the institutional experience required to manage a supply chain, service organization among other functions.
6. Diversification
Diversification has a non-linear scoring method. Companies that are pure-play solar companies receive the lowest score because they’re more sensitive to market fluctuations. Conversely, being well-balanced between solar and non-solar businesses returns the highest scores because the business cycles offset one another. Very diverse business portfolios receive the second highest score.
Scoring Satcon Technology Post-Bankruptcy
After applying this methodology to the inverter manufacturer Satcon Technology, which announced its bankruptcy in October 2012, it’s clear this tool could have created a critical discussion point for project stakeholders assessing a low-cost inverter manufacturer’s financial viability.
What happened in Q4 2011 was the perfect storm. Satcon’s debt to equity ratio becomes negative after seven consecutive quarters of relatively high ratios. Balance sheet strength had its third straight quarter below 0.25 implying that the company had less than $0.25 in cash for every $1.00 of liabilities owed over the next year. And finally, Satcon had four consecutive quarters of unprofitability. The lack of profits over a sustained period made it difficult to fund either their assets to improve their debt to equity ratio or their cash to improve their short term debt coverage.
As the solar industry continues to consolidate, having an open and simple method for measuring bankability will hopefully generate discussion about appropriately measuring financial risk with the purpose of creating business models that help the industry grow in a sustainable manner.
Matt Denninger, Senior Marketing Manager at Advanced Energy, has a deep background in the high-tech and renewable energy industries, having held leadership positions in strategy, business development, marketing and sales at Advanced Energy, Applied Materials, Applied Films, and Marubeni.
