Kroll Bond Ratings said it expects the first rated securitization of commercial property assessed clean energy (PACE) loans in 2013.

PACE is essentially a financing structure that enables local governments to raise money through the issuance of bonds or other sources of capital to fund energy efficiency and renewable energy projects.

Those costs are financed through the issuance of a micro bond at the municipal level and the bond is repaid by billings on the borrower's property tax bill over a 10- to 20-year period. In a typical assessment district, a municipality issues bonds to fund projects with a public purpose, such as street lights, sewer systems or underground utility lines.

The ratings agency earmarked commercial PACE loans to be one of the first renewable energy backed assets to be securitized because the asset class has strong credit attributes.

Kroll said in a report this week that the commercial PACE program has stringent eligibility requirements for approval of financing that are suitable for securitization.   

Because the securitizations would be serviced by the municipality, the financial condition and operational abilities of the municipalities are key determinants in rating these deals, said Kroll.

To date 27 states have enacted legislation for PACE programs.

The loans can be made for residential properties and have the same priority as real estate taxes. Residential PACE loans are therefore considered senior to any non-tax liens, a detail that has made mortgage lenders uncomfortable because they are no longer the first payment priority.

Fannie Mae and Freddie Mac, for instance, along with their regulator, the Federal Housing Finance Agency have all said that they won't recognize a PACE lien on any residential homes that they finance “due to the unusual and difficult risk management challenges for lenders, servicers and mortgage securities investors.”



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