SolarCity's fund raising a concern amid slowing growth

(Reuters) - SolarCity Corp's SCTY.O shares plunged on Wednesday as investors worried about the company's ability to raise funds amid slowing growth in rooftop solar panel installations.

Shares of SolarCity, backed by Tesla Motors CEO Elon Musk, slumped as much as 31 percent to their lowest in nearly three years, a day after the company said it installed fewer-than-expected solar systems for the second straight quarter.

SolarCity lets homeowners avoid the hefty upfront cost of installing solar systems by allowing them to make low monthly payments for about 20 years.

While this model has helped the company boost installations by eight-fold in three years, it has also increased costs and strained its ability to generate cash.

The company has said it wants to slow its pace of growth to turn cash-flow positive by the end of the year.

But the company’s “hunger for new capital” remains a concern, J.P. Morgan analysts wrote in a note. The brokerage and eight others cut their price targets on SolarCity shares on Wednesday.

SolarCity has been covering the cost of new installations by issuing asset-backed debt and through proceeds from tax equity deals, which allow investors to claim lucrative federal tax credits for solar energy systems.

The cost of raising capital, however, is increasing.

The yield on a $185 million private placement of the company’s residential loans in January was higher than the company’s previous offerings, indicating increased risk.

SolarCity requires about $3.2 billion in capital this year, of which about $600 million will likely come from asset-backed securities and asset monetization, according to analysts at Roth Capital Partners. The brokerage cut its rating on the stock to “neutral” from “sell.”

The fall in installations is even more worrying, analysts said, because it comes despite an extension of U.S. tax credits for solar projects beyond 2016.

“(The company’s forecast) is even more regrettable as the overall fundamentals for the residential solar sector continue to remain pretty solid,” said Portfolio manager Thiemo Lang of Zurich’s RobecoSAM.

“It might take time for them to regain trust. The current difficult stock markets just do not allow small misses.”

Up to Tuesday’s close, SolarCity shares had more than halved in value in the past 12 months, partly because a steep decline in oil prices is weighing on investor interest in all renewable energy stocks.

Reporting by Swetha Gopinath and Amrutha Gayathri in Bengaluru; Editing by Sayantani Ghosh and Saumyadeb Chakrabarty