Yieldcos such as 8Point3 Energy Partners, because they payout almost all CAFD to investors, require strong access to both cheap debt and equity markets to fund growth.
While the recent extension of the Solar Income Tax Credit greatly helped 8Point3's share price, it is still trading substantially below its IPO price of $21. That is potentially bad news for long-term income investors because should shares fall much lower, management may not be able to profitably sell new shares to finance further asset acquisitions.
This is important, because as of the end of Q4 2015, 8Point3 Energy Partners had $297.2 million in debt and $200 million of its $233 million in liquidity is from its revolving credit facility. This facility includes debt covenants. Exceeding this ratio would force 8Point3 to suspend distributions, so the yieldco is limited in how much it can borrow.
Thus, investors can probably expect substantial equity issuances in 2016 as 8Point3 proceeds with its growth plans, assuming the share price is high enough to make such deals profitable.
Bottom line
8Point3 Energy Partners' business model is one of the safer ways for dividend lovers to potentially cash in on solar energy growth. However, investors need to realize that, though its actual cash flows aren't directly affected by gas and oil prices , until energy prices recover the yieldco may be forced to rely mostly on more creative ways to fund drop down acquisitions from First Solar and SunPower.
That, in turn, could prolong how long it takes for 8Point3 to acquire new assets. And that may force management to pare back its distribution growth guidance in the future, potentially causing Wall Street to punish the share price even more.
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The article The 1 Thing That Could Derail 8Point3 Energy Partners's Hypergrowth Plans in 2016 originally appeared on Fool.com.
Adam Galas owns shares of 8Point3 Energy Partners. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
