NEW YORK, March 7 (IFR) - The first-ever ABS backed by
property-tax assessments funding residential renewable-energy
and energy-efficient projects - known as Property Assessed Clean
Energy loans - priced yesterday.
The new innovation offered a relatively juicy yield to ABS
investors who enjoyed the 4.75% coupon and the 11-year duration.
PACE loans can finance a variety of renewable energy
projects and efficiency improvements, such as installing new
windows and upgrading heating and air conditioning systems.
In the PACE program, the local county or municipality offers
a tax assessment increase in exchange for paying up-front costs
to fund these various "green" energy-saving improvements.
In the US$104m deal, titled HERO Funding 2014-1, the average
assessment was about US$18,000, according to Kroll, which
sole-rated the deal at the AA level. The PACE program is a green
alternative to borrowers either paying out of pocket for such
improvements or taking on unsecured consumer loans that pay down
The county increases the property-tax assessment by
approximately US$2000 per year.
Excess interest, overcollateralization, and a liquidity
reserve provided protection on the deal: For instance, the
single-tranche transaction paid a coupon of 4.75%, compared with
an underlying coupon of 8% on the underlying PACE limited
Additionally, the deal doesn't advance par - it advances
approximately 97 cents on the dollar, according to sources
familiar with the transaction.
Overcollateralization will be 3.00% of the initial aggregate
PACE bond principal amount, and the liquidity reserve amount
will initially be 3.00% of the aggregate PACE bond principal
amount, which equals approximately seven months of interest.
The liquidity reserve will gradually build up to 7.00% of
the outstanding collateral principal, which equals approximately
17 months of interest, Kroll said. There are also a number of
eligibility requirements on top of all this, covering the
property owner and property.
There is also a requirement that the lien that gets assessed
against the property could not be more than 15% of the property
The trade however seemed to exacerbate an ongoing battle
that the municipal-loan product has had with the government
sponsored enterprises in recent years.
This is because the property tax liens associated with the
homes underlying the security, which are meant to fund
energy-savings measures, are senior to all other liens -
including mortgages on the properties financed by Fannie Mae and
Freddie Mac (which currently finance close to 90% of US
In other words, payment priority is an issue: if a
foreclosed property is liquidated, the PACE loans get paid back
before the GSEs do.
The GSEs have not been happy about this, and in 2010 their
regulator, the Federal Housing Finance Agency, ordered Fannie
and Freddie to avoid financing mortgages on homes with PACE
liens already on them.
In March 2013 the GSEs even defeated an effort in court by
various California counties - and the Sierra Club - to force the
FHFA to adopt new rules that would prevent Fannie and Freddie
from avoiding homes that have PACE assessments on them. The FHFA
succeeded, and Fannie confirmed and stood by its policy in a
note to clients last November.
That factor gave some investors pause in this week's ABS,
although sources said the GSEs only financed less than 40% of
the mortgages linked to the residential properties with PACE
loans in the deal's underlying portfolio.
There is also a specific "final, non-appealable judicial
order" that affirmed in Riverside County the seniority of the
PACE lien versus any other liens, according to a presale report
from Kroll Ratings. Kroll noted that there was a risk the
validity of a PACE lien against a mortgagee's security interest
could be challenged in the federal court.
The investor orders for the small transaction were described
as "big and chunky", as it was not a particularly broadly
"It was a complicated story, and was more or less privately
placed," said one ABS market participant.
About 90 individual so-called PACE limited obligation bonds
secured the transaction, which was lead-managed and structured
by Deutsche Bank.
These bonds have coupons that will be paid by money
collected by the California county of Riverside in the form of
nearly 6,000 tax assessments levied against a similar number of
residential properties in the area.
A government entity, the Western Riverside Council of
Governments, worked with two different third parties to get the
deal done: Renovate America, a municipal consulting firm, and
400 Capital, the portfolio administrator.
Renovate America dealt with the administration of all the
The new trade signals the further expansion of products in
the US ABS market after last November's first-ever USD54.425m
solar ABS from SolarCity.
That deal was backed by a portfolio of SolarCity's
photovoltaic (PV) solar systems as well as related contractual
host customer payments and performance-based incentive payments.
Securitization specialists said PACE loans were much better
from a credit quality perspective compared to solar ABS; the
senior liens on the underlying properties in the PACE deals are
superior to payment priorities structured into the solar ABS
"Interest in this deal shows that investors are looking for
a different thing," the banker said. "And the 4.75% coupon gets
peoples' attention - especially when spreads on asset classes
such as timeshare and container leases are getting tighter and