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Securitization experts say solar-panel bonds may be next ABS
January 30, 2013 / 7:56 PM / in 5 years

Securitization experts say solar-panel bonds may be next ABS

NEW YORK, Jan 30 (IFR) - ‘Solar ABS’ may yet see the light of day.

The green technology which harnesses the heat and energy of the sun to generate power has been around since the 1960s. But the solar industry’s attempts to tap the securitization market for funding have not yet come to fruition, despite tremendous efforts.

That may be about to change, according to a panel of securitization experts speaking at an “Emerging ABS Sector Review” session at the American Securitization Forum’s annual conference in Las Vegas.

“This is a good asset for investors with a strong bid for long-duration paper,” said Leo Burrell, managing director at Credit Agricole Securities. “We like it.”

Chris Murphy, director of structured finance at Oakland, California-based Sungevity, a company which leases out roof-mounted residential photovoltaic solar panels to homeowners who are hoping to pay less for electricity, agreed.

Sungevity and other residential and commercial solar-panel installers, have been working hard to get a securitization backed by solar-panel lease revenues off the ground.

In a proposed offering, bond investors would be paid by the lease-payment cashflows of Sungevity’s customers. The leases would have a 20-year term, and the company targets consumers who have FICO scores of mostly 700 or better.

Sungevity pitches itself by promising homeowners that their electricity bills will shrink. It offers a “zero dollars down” plan and a performance guarantee -- that is, a promise that the solar-panel system will produce enough power over time.

“Eighty percent of (solar-panel) customers save money from Day One,” Murphy said. Even though the technology is not new, he said the cost curve has come down over the years versus paying for power from a utility.


Despite that progress, the product has still struggled to get off the ground, in part due to apprehension on the part of credit rating agencies to rate the deals.

The agencies have been spooked by the relative newness of the asset class and its lack of history, the panel heard.

“The question is whether the advance rates you get based on ratings will be conservative at the outset,” said panelist Cory Wishengrad, managing director and co-head of securitized products at Barclays.

‘Advance rate’ refers to the maximum amount of loan a company such as Sungevity could receive based on a percentage of the value of some of its collateral -- in this case, customer receivables from paying homeowners.

A lower investment-grade rating on a solar ABS means that lenders would advance less to the company - not exactly an ideal financing option.

“Also, will (securitization) be competitive with other funding sources in the sector?”, Wishengrad said. “Can you get optimal execution in the securitization market?”

Some solar companies have explored other avenues, such as venture capital investments, for example.

The sole rating agency analyst on the panel, Eric Williamson of Kroll, said that advance rates would indeed be conservative, with ratings in the low investment-grade spectrum.

But Williamson believes the product is the “right material” for securitization, saying that “the hard asset itself brings strength to the table.”

As with all untested asset classes, there are risks to consider. Besides the obvious risk of a customer defaulting, the much more likely one is what Murphy calls a “homeowner event”, moving or death.

He cited a recent survey from the National Association of Homebuilders that found the average homeowner stays in his home for 13 years before relocation.

But there are other risks for ABS investors, including lease rates that may fail to keep up with inflation, the need for a backup servicer in case a company such as Sungevity is no longer able to service the leases, foreclosures, defaults and tax issues.

Regarding the latter, there are a number of federal tax credits associated with the “renewable energy” industry and the relationship between solar-panel ABS and tax equity vehicles or other possible asset claims can become quite complicated, said Murphy.

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