Yesterday, Citizenre released a press release announcing their “financing team” that will help them raise funding. Citizenre does not have any funding. You don't make this announcement if you have already closed financing. If you have funding, this is not news.

My analysis from six months ago that Citizenre is a highly unethical attempt to prove that there is sufficient demand (e.g. FRAs) to justify financing remains valid. Unfortunately, Citizenre's timing is lousy and they are extemely vulnerable because they tried to sell first and only after they succeeded in selling, finance and build long-lead time infrastructure (PV and inverter manufacturing plant; thousands of installations dependent on equipment made in the plant).

We are several weeks into the worst credit crunch since 1973 and possibly 1929/1930. Lending has largely stoped - particularly for sub-prime and alt-a mortgages, jumbo mortgages, asset-backed securities, junk bonds, commercial paper, M&A takeovers, and pretty much all lending below AA or AAA. Major banks and investment banks have several hundred billion worth of loans made in the last couple of months (mostly for M&A deals and asset securitization deals) that they are unable to sell to investors without taking major losses. Everyone is scared and pulling back right now. For the little bit of lending that is available, credit spreads have increased by several hundred basis points. This means that if you were expecting a 5% interest rate in July, you may be paying 7% or 7.5% in August if you can still get the loan. Any assumptions about financing that are more than two weeks old have to be revisited. A month ago, GE Money was willing to finance PV systems for single family homes at rates between 7.5% and 14+%, but wanted 5 to 7 year terms. However, even then, they were more interested in commercial PV loans than residential loans. GE is still trying to value the collateral value of home PV systems - there are a lot of technical challenges and costs associated with removing PV systems and a used system may only have value for the first five years.

For Citizenre, they have the assumption that they can essentially give low interest, no documentation, 25 year loans to their customers (a lender's view of the FRA cashflows). This is essentially a sub-prime, unsecured loan, and any asset-backed security based on a pool of these FRAs would be extremely hard to value right now. The default rate on FRA's is unknown. Likewise, the cancellation rate and the effective duration of the FRA stream (e.g. how long the average customer has the system on their roof given the easy cancellation terms) are also unknown. Right now, investors do not trust the investment bank valuations of asset-backed securities because 1) there is really no liquid market for these, 2) everything is marked-to-model (where the model is an investment bank spreadsheet) based on investment bank assumptions that may be questionable and overly optimistic, 3) there are major conflicts of interest by the rating agencies and investment banks, and 4) there has been way too much fraud in this space (as much as 50% of all sub-prime loans may have been tainted by frauds committed by one or more of the parties involved - the borrower, the broker, the originator, the rating agency, the investment bank, the appraiser).

If you change the assumptions, Citizenre's model will break down. 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.

Even if we assume that this deal was fundable in the second quarter of this year, today it is toxic and unfundable given the credit crunch. When one adds the other risks in the deal (execution, inexperienced management team, technology risks, manufacturing risks, MLM marketing scheme), it becomes even less likely to get funded.

Finally, Structured Growth Partners is a no-name, two-person fundraising company with no history or verifiable information. It is unlikely that they are registered with the SEC as a broker-dealer (legally required if they take commissions or success fees from Citizenre on any funds raised). If you are trying to raise hundreds of millions or billions of dollars, you don't use a no-name firm, you use either a major investment bank or specialty boutique (energy) investment bank with a proven track record in the field. The little advisors are typically used by startups and small businesses to help them get between several hundred thousand and several million dollars. They also frequently want excessive fees that scare away legitimate investors - particularly venture capital firms.