Note 11 – Convertible and Long-Term Debt Obligations

The following is a summary of our debt as of September 30, 2017 (in thousands):

	Unpaid						Unused
	Principal		Net Carrying Value				Committed		Contractual
	Balance		Current		Long-Term		Amount		Interest Rate			Maturity Date
Recourse debt:
1.50% Convertible Senior Notes due in 2018 ("2018 Notes")	$	17,512	$	17,155	$	—	$	—		1.50	%	June 2018
0.25% Convertible Senior Notes due in 2019 ("2019 Notes")		920,000		—		858,449		—		0.25	%	March 2019
1.25% Convertible Senior Notes due in 2021 ("2021 Notes")		1,380,000		—		1,172,195		—		1.25	%	March 2021
2.375% Convertible Senior Notes due in 2022 ("2022 Notes")		977,500		—		834,834		—		2.375	%	March 2022
5.30% Senior Notes due in 2025 ("2025 Notes")		1,800,000		—		1,774,742		—		5.30	%	August 2025
Credit Agreement		1,269,000		—		1,269,000		535,095	1% plus LIBOR			June 2020
Vehicle and Other Loans		15,367		12,863		2,504		—	1.8%-7.6%			October 2017- September 2019
2.75% Convertible Senior Notes due in 2018		230,000		—		221,166		—		2.75	%	November 2018
1.625% Convertible Senior Notes due in 2019		566,000		—		506,535		—		1.625	%	November 2019
Zero-coupon Convertible Senior Notes due in 2020		103,000		—		85,182		—		0.0	%	December 2020
Related Party Promissory Notes due in February 2018		100,000		100,000		—		—		6.5	%	February 2018
Solar Bonds		32,016		6,424		25,135		—	2.6%-5.8%			March 2018- January 2031
Total recourse debt		7,410,395		136,442		6,749,742		535,095
Non-recourse debt:
Warehouse Agreements		556,992		154,191		402,801		43,008		2.7	%	September 2019
Canada Credit Facility		55,072		21,357		33,715		—	3.6%-4.5%			December 2020
Term Loan due in December 2018		154,573		3,943		150,306		21,299		4.7	%	December 2018
Term Loan due in January 2021		178,820		5,745		171,938		—		4.8	%	January 2021
Revolving Aggregation Credit Facility		420,265		—		417,681		179,735	4.1%-4.8%			December 2019
Solar Renewable Energy Credit Loan Facility		45,389		17,025		28,509		—		7.0	%	July 2021
Cash Equity Debt		488,000		12,397		459,987		—	5.3%-5.8%			July 2033- January 2035
Solar Asset-backed Notes		438,417		16,403		406,327		—	4.0%-5.6%			November 2038- September 2046
Solar Loan-backed Notes		244,498		8,003		228,723		—	4.8%-7.5%			September 2048- September 2049
Total non-recourse debt		2,582,026		239,064		2,299,987		244,042
Total debt	$	9,992,421	$	375,506	$	9,049,729	$	779,137

The following is a summary of our debt as of December 31, 2016 (in thousands):

	Unpaid						Unused
	Principal		Net Carrying Value				Committed		Contractual
	Balance		Current		Long-Term		Amount		Interest Rate			Maturity Date
Recourse debt:
2018 Notes	$	205,013	$	196,229	$	—	$	—		1.50	%	June 2018
2019 Notes		920,000		—		827,620		—		0.25	%	March 2019
2021 Notes		1,380,000		—		1,132,029		—		1.25	%	March 2021
Credit Agreement		969,000		—		969,000		181,000	1% plus LIBOR			June 2020
Secured Revolving Credit Facility		364,000		366,247		—		24,305	4.0%-6.0%			January 2017- December 2017
Vehicle and Other Loans		23,771		17,235		6,536		—	2.9%-7.6%			March 2017- June 2019
2.75% Convertible Senior Notes due in 2018		230,000		—		212,223		—	2.75%			November 2018
1.625% Convertible Senior Notes due in 2019		566,000		—		483,820		—	1.625%			November 2019
Zero-coupon Convertible Senior Notes due in 2020		113,000		—		89,418		—	0.0%			December 2020
Solar Bonds		332,060		181,582		148,948	#		1.1%-6.5%			January 2017- January 2031
Total recourse debt		5,102,844		761,293		3,869,594		205,305
Non-recourse debt:
Warehouse Agreement		390,000		73,708		316,292		210,000	Various			September 2018
Canada Credit Facility		67,342		18,489		48,853		—	3.6%- 4.5%			December 2020
Term Loan due in December 2017		75,467		75,715		—		52,173	4.2%			December 2017
Term Loan due in January 2021		183,388		5,860		176,169		—	4.5%			January 2021
MyPower Revolving Credit Facility		133,762		133,827		—		56,238	4.1%-6.6%			January 2017
Revolving Aggregation Credit Facility		424,757		—		427,944		335,243	4.0%-4.8%			December 2018
Solar Renewable Energy Credit Term Loan		38,124		12,491		26,262		—	6.6%-9.9%			April 2017- July 2021
Cash Equity Debt		496,654		13,642		466,741		—	5.3%-5.8%			July 2033- January 2035
Solar Asset-backed Notes		458,836		16,113		426,651		—	4.0%-7.5%			November 2038- September 2046
Solar Loan-backed Notes		140,586		3,514		133,510		—	4.8%-6.9%			September 2048
Total non-recourse debt		2,408,916		353,359		2,022,422		653,654
Total debt	$	7,511,760	$	1,114,652	$	5,892,016	$	858,959

#	Out of the $350.0 million authorized to be issued, $17.9 million remained available to be issued.

Recourse debt refers to debt that is recourse to our general assets. Non-recourse debt refers to debt that is recourse to only specified assets of our subsidiaries. The differences between the unpaid principal balances and the net carrying values are due to convertible senior note conversion features, debt discounts and deferred financing costs. As of September 30, 2017, we were in compliance with all financial debt covenants. The following descriptions summarize the significant debt activity in the nine months ended September 30, 2017.

2018 Notes

In June 2017, $144.8 million in aggregate principal amount of the 2018 Notes were exchanged for 1,163,442 shares of our common stock (see Note 12, Common Stock). As a result, we recognized a loss on debt extinguishment of $1.1 million.

In the third quarter of 2017, $42.7 million in aggregate principal amount of the 2018 Notes were exchanged or converted for 250,198 shares of our common stock (see Note 12, Common Stock) and $32.7 million in cash. As a result, we recognized a loss on debt extinguishment of $0.3 million.

2022 Notes, Bond Hedges and Warrant Transactions

In March 2017, we issued $977.5 million in aggregate principal amount of 2.375% convertible senior notes due in March 2022 in a public offering. The net proceeds from the issuance, after deducting transaction costs, were $965.9 million.

Each $1,000 of principal of the 2022 Notes is initially convertible into 3.0534 shares of our common stock, which is equivalent to an initial conversion price of approximately $327.50 per share, subject to adjustment upon the occurrence of specified events. Holders of the 2022 Notes may convert, at their option, on or after December 15, 2021. Further, holders of the 2022 Notes may convert such 2022 Notes, at their option, prior to December 15, 2021, only under the following circumstances: (1) during any quarter beginning after June 30, 2017, if the closing price of our common stock for at least 20 trading days (whether or not consecutive) during the last 30 consecutive trading days immediately preceding the quarter is greater than or equal to 130% of the conversion price; (2) during the five-business day period following any five-consecutive trading day period in which the trading price of the 2022 Notes is less than 98% of the average of the closing price of our common stock for each day during such five-consecutive trading day period; or (3) if we make specified distributions to holders of our common stock or if specified corporate transactions occur. Upon a conversion, we would pay cash for the principal amount and, if applicable, deliver shares of our common stock (subject to our right to deliver cash in lieu of all or a portion of such shares of our common stock) based on a daily conversion value. If a fundamental change occurs prior to the maturity date, holders of the 2022 Notes may require us to repurchase all or a portion of their 2022 Notes for cash at a repurchase price equal to 100% of the principal amount plus any accrued and unpaid interest. In addition, if specific corporate events occur prior to the maturity date, we would increase the conversion rate for a holder who elects to convert their 2022 Notes in connection with such an event in certain circumstances. As of September 30, 2017, none of the conditions permitting the holders of the 2022 Notes to early convert had been met. Therefore, the 2022 Notes are classified as long-term debt.

In accordance with GAAP relating to embedded conversion features, we initially valued and bifurcated the conversion feature associated with the 2022 Notes. We recorded to stockholders’ equity $145.6 million for the conversion feature. The resulting debt discount is being amortized to interest expense at an effective interest rate of 6.00%.

In connection with the offering of the 2022 Notes, we entered into convertible note hedge transactions whereby we had the option to purchase initially (subject to adjustment for certain specified events) a total of 3.0 million shares of our common stock at a price of $327.50 per share. The cost of the convertible note hedge transactions was $204.1 million. In addition, we sold warrants whereby the holders of the warrants had the option to purchase initially (subject to certain specified events) a total of 3.0 million shares of our common stock at a price of $655.00 per share. We received $52.9 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and the sale of warrants are intended to reduce potential dilution from the conversion of the 2022 Notes and to effectively increase the overall conversion price from $327.50 to $655.00 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost incurred in connection with the convertible note hedge and warrant transactions was recorded as a reduction to additional paid-in capital on our consolidated balance sheet.

2025 Notes

In August 2017, we issued $1,800.0 million in aggregate principal amount of unsecured 5.30% senior notes due in August 2025 pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). The net proceeds from the issuance, after deducting transaction costs, were $1,774.2 million.

Secured Revolving Credit Facility

In August 2017, the secured revolving credit facility was terminated, and the aggregate outstanding principal amount of $324.0 million was fully repaid.

Zero-coupon Convertible Senior Notes due in 2020

On April 26, 2017, our Chief Executive Officer converted all of his zero-coupon convertible senior notes due in 2020, which had an aggregate principal amount of $10.0 million (see Note 12, Common Stock). As a result, we recognized a loss on debt extinguishment of $2.2 million.

Related Party Promissory Notes due in February 2018

On April 11, 2017, our Chief Executive Officer, SolarCity’s former Chief Executive Officer and SolarCity’s former Chief Technology Officer exchanged their $100.0 million (collectively) in aggregate principal amount of 6.50% Solar Bonds due in February 2018 for promissory notes in the same amounts and with substantially the same terms.

Solar Bonds

Solar Bonds are senior unsecured obligations that are structurally subordinate to the indebtedness and other liabilities of our subsidiaries. Solar Bonds were issued under multiple series between October 2014 and August 2016 with various terms and interest rates. In April 2017, we fully extinguished certain series of Solar Bonds by prepaying $20.9 million of principal and interest. See Note 16, Related Party Transactions, for Solar Bonds issued to related parties.

Warehouse Agreements

On August 31, 2016, our subsidiaries entered into a Warehouse Agreement with a bank for loans secured by the future cash flows arising from certain leases and the related leased vehicles. On August 17, 2017, the Warehouse Agreement was amended to modify the interest rates and extend the availability period and the maturity date, by appending another Warehouse Agreement with substantially the same terms and that shares the same committed amount. Amounts drawn under the Warehouse Agreements generally bear interest at (i) LIBOR plus a fixed margin or (ii) the commercial paper rate. The Warehouse Agreements are non-recourse to our other assets.

Pursuant to the Warehouse Agreements, an undivided beneficial interest in the future cash flows arising from certain leases and the related leased vehicles has been sold for legal purposes but continues to be reported in the consolidated financial statements. The interest in the future cash flows arising from these leases and the related vehicles is not available to pay the claims of our creditors other than pursuant to obligations to the lenders under the Warehouse Agreements. We retain the right to receive the excess cash flows not needed to pay obligations under the Warehouse Agreements.

On October 18, 2017, the total committed amount under the Warehouse Agreements was increased from $600.0 million to $1.1 billion.

Term Loan due in December 2018

On March 31, 2016, a subsidiary of SolarCity entered into an agreement for a term loan. The term loan bears interest at an annual rate of the lender’s cost of funds plus 3.25%. The fee for undrawn commitments is 0.85% per annum. On March 31, 2017, the agreement was amended to extend the availability period and the maturity date. The term loan is secured by substantially all of the assets of the subsidiary and is non-recourse to our other assets.

MyPower Revolving Credit Facility

In January 2017, the MyPower revolving credit facility matured, and the aggregate outstanding principal amount of $133.8 million was fully repaid.

Revolving Aggregation Credit Facility

On May 4, 2015, a subsidiary of SolarCity entered into an agreement with a syndicate of banks for a revolving aggregation credit facility. On March 23, 2016 and June 23, 2017, the agreement was amended to modify the interest rates and extend the availability period and the maturity date. The revolving aggregation credit facility bears interest at an annual rate of 2.75% plus (i) for commercial paper loans, the commercial paper rate and (ii) for LIBOR loans, at our option, three-month LIBOR or daily LIBOR. The revolving aggregation credit facility is secured by certain assets of certain subsidiaries of SolarCity and is non-recourse to our other assets.

Solar Renewable Energy Credit Loan Facilities

On March 31, 2016, a subsidiary of SolarCity entered into an agreement for a term loan. The term loan bore interest at an annual rate of one-month LIBOR plus 9.00% or, at our option, 8.00% plus the highest of (i) the Federal Funds Rate plus 0.50%, (ii) the prime rate or (iii) one-month LIBOR plus 1.00%. The term loan was secured by substantially all of the assets of the subsidiary, including its rights under forward contracts to sell solar renewable energy credits, and was non-recourse to our other assets. On March 1, 2017, we fully repaid the principal outstanding under the term loan.

On July 14, 2016, the same subsidiary entered into an agreement for another loan facility. The loan facility bears interest at an annual rate of one-month LIBOR plus 5.75% or, at our option, 4.75% plus the highest of (i) the Federal Funds Rate plus 0.50%, (ii) the prime rate or (iii) one-month LIBOR plus 1.00%. The loan facility is secured by substantially all of the assets of the subsidiary, including its rights under forward contracts to sell solar renewable energy credits, and is non-recourse to our other assets.

Solar Loan-backed Notes, Series 2017-A

On January 27, 2017, we pooled and transferred certain MyPower customer notes receivable into a special purpose entity (“SPE”) and issued $123.0 million in aggregate principal amount of Solar Loan-backed Notes, Series 2017-A, Class A; $8.8 million in aggregate principal amount of Solar Loan-backed Notes, Series 2017-A, Class B; and $13.2 million in aggregate principal amount of Solar Loan-backed Notes, Series 2017-A, Class C; backed by these notes receivable to investors. The SPE is wholly owned by us and is consolidated in our financial statements. Accordingly, we did not recognize a gain or loss on the transfer of these notes receivable. The Solar Loan-backed Notes were issued at a discount of 1.87% for Class A, 1.86% for Class B and 8.13% for Class C. The payments received by the SPE from these notes receivable are used to service the semi-annual principal and interest payments on the Solar Loan-backed Notes and satisfy the SPE’s expenses, and any remaining cash is distributed to one of our wholly owned subsidiaries. The SPE’s assets and cash flows are not available to our other creditors, and the creditors of the SPE, including the Solar Loan-backed Note holders, have no recourse to our other assets.

Interest Expense

The following table presents the interest expense related to the contractual interest coupon, the amortization of debt issuance costs and the amortization of debt discounts on convertible senior notes with cash conversion features, which includes the 2018 Notes, the 2019 Notes, the 2021 Notes and the 2022 Notes (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Contractual interest coupon	$	10,899	$	6,615	$	28,306	$	23,330
Amortization of debt issuance costs		1,759		4,952		5,274		8,835
Amortization of debt discounts		29,888		24,660		83,852		75,493
Total	$	42,546	$	36,227	$	117,432	$	107,658