United States: Structuring A Green Securitisation Deal

Last Updated: April 16 2018
Article by Andrew Steck

We are approaching a golden age for green bonds. There is a substantial gap for asset managers and other direct lenders to step in and provide support in areas such as solar ABS and PACE loans.

The Climate Bonds Initiative (CBI) highlighted that green bond issuance grew from a few billion dollars in 2012 to over US$100bn in 2017. Citigroup expects the value of green bonds to grow to US$1tn by 2020, and account for 10-20% of the US$7tn securities market within 10 years.

In both the US and Europe, it is widely expected that asset-backed securities (ABS) will significantly increase their issuance. The OECD has stated that a third of the outstanding low carbon bonds sector could be ABS by 2035.

Such growth in green financing can't be sustained by the banks alone. There is a substantial gap for asset managers and other direct lenders to step in and provide support in areas such as solar ABS and Property Assessed Clean Energy (PACE) loans.

But what are the options available? And how do you go about structuring a green securitisation deal? These topics were covered in a recent webinar hosted by Jennifer Deloney, Associate Editor, Renewable Energy World, who moderated a panel comprising experts from kWh Analytics, Lord Capital, Renew Financial and TMF Group.

Gaining PACE rapidly

Both solar ABS and residential PACE bonds, which allow property owners to finance environmentally-friendly upgrades, are proving popular in the US and beginning to pick up in Europe. Over US$1.5bn of residential PACE securitisations were issued in 2017. As of March 2018, 33 US states had passed PACE legislation – remarkable in a partisan political landscape.

PACE isn't new, it's simply a new use of an old property assessment financing tool to solve housing challenges. Local governments in the US have been financing street paving and sewer connections for years using PACE. However, the concept of a PACE bond looks new to homeowners, or someone working in the capital markets.

Through the PACE model, cities and counties are enabled by state law to create an assessment district, or a similar legal mechanism. Property owners can then sign up for financing to install approved energy projects. The property owner repays through property tax.

One of the key components to PACE is the question of where the capital comes from? The answer is that PACE originators have developed a robust investor base, including insurance companies, asset managers and credit funds. PACE ABS are considered green bonds based on the Green Bond Principles published by the International Capital Market Association (ICMA), and certain securitisations have been assigned a GB1 (Excellent) grade from Moody's. This combination of a very secure and very green bond has led to quick adoption by investors around the world.

The (gradual) arrival of commercial PACE securitisations

Most green securitisations have been on the residential side, but the commercial side is opening up. Greenworks Lending issued the first commercial PACE securitisation in November 2017, and other deals are close to market.

Commercial PACE has been slower because the asset characteristics are different. The marketing and asset origination process is subject to more decision makers, and so it takes time. For example, a residential homeowner deciding to put a solar panel on their roof is a quick decision. But with commercial property, a wider range of stakeholders – including developers and contractors – can take months, or years, to agree everything.

Given the time it takes for asset origination, it therefore takes longer for investors, ratings agencies and other constituents to come into play. They then must be comfortable that there is scope to create a diversified pool that will have liquidity in the markets.

Once diversification can be achieved, investors are looking at an asset that offers superior credit characteristics, with low prepay rates and high prepay penalties. It is anticipated that 2018 will be an active year, with multiple issuers preparing to access the markets through both private placements and liquid 144A deals.

Pushing the data button

Ultimately data underpins bringing a green securitisation to life. In more traditional solar financing, it is essential to the financing ecosystem.

With solar projects, the originator, or seller, of the panels is usually also the servicer, responsible for the technical reporting and maintenance of the physical asset. But then the risk management, and other associated administrative concerns, are the responsibility of the financial investor.

Investment in solar energy projects requires complex due diligence. The industry has matured over the past decade, and industry stakeholders have developed effective risk management techniques to improve the quality of cash flows and reduce credit-related risk factors.

In addition, the US Department of Energy's Orange Button project is supporting the creation and widespread adoption of industry-led open data standards for faster, seamless data exchange across the solar value chain. This initiative helps to highlight the risks that an investor is exposed to – what is the asset, where is it located, how is it performing?

Bringing it all together

Green securitisation provides various benefits to both issuer and investor. Securitisation transactions are complex and collaboration is crucial - there is often a host of support service providers, spanning legal advisers, ratings agencies, asset managers and more.

The primary consideration is building your portfolio: developing a large and diverse enough asset pool to reach the capital markets.

From that point, it then comes down to working through the necessary steps - establishing a Special Purpose Vehicle (SPV) or other type of specialised entity that is going to hold these assets, developing a legal infrastructure to facilitate the issuance of the bond, and providing the necessary data to the ratings agencies to achieve that target rating you're looking for.

Once these steps have been taken, you will be able to access the markets to develop a deep base of investors to purchase the bonds and achieve liquidity.

Talk to us

TMF Group has been involved in green securitisation since the sector was established, and we remain at the forefront of developments. Many of our clients are issuers and investors.

Get in touch to learn more about this asset class, corresponding structures and solutions for administering transactions and solving oversight challenges.

Don't let complexity hold you back – find out how our services help our clients reach new heights.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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