PACE Funding sticking to private placements, at least for now

PACE Funding Group’s third securitization of Property Assessed Clean Energy assets, completed last week, was privately placed, but the Los Gatos, California-based company is still believed to be eyeing a possible public transaction over the next 12 months.

The $55 million deal that closed Friday was placed with investors by SunTrust Robinson Humphrey, and privately rated by Morningstar Credit Ratings. It follows two private deals that PACE Funding completed in 2018 totaling $115 million.

In a statement issued Monday, James Vergara, PACE Funding’s head of capital markets, said the company was “very pleased” with the reception it received from investors. The statement did not provide any additional information about the deal, but the collateral consists entirely of PACE assets originated in California, according to a person familiar with the situation. PACE Funding has yet to securitize any assets originated in Florida, the second biggest market for residential PACE.

Still, the company's financing of energy and water efficiency upgrades on homes in California quadrupled last year to $100 million from just $25 million in 2017, and it expects to originate another $150 million to $200 million of assets this year, this person said.

That growth is in sharp contrast to some more established players that saw origination in California decline sharply last year after new consumer protection rules enacted by the state late in 2017 began to take effect. This lower origination has resulted in lower securitization volume. So far this year, there has only been one rated residential PACE securitization, a $225 million deal from Ygrene in January.

PACE Funding alluded to these industry challenges in its statement Monday, saying "we pride ourselves on our commitment to consumer protection and policing the contractor channel and we believe that this will differentiate our assets from others in the market.“

The company plans another securitization this year, most likely a private placement, according to the person familiar with the situation. While a 144a offering can provide less expensive funding than a private deal, private deals provide a lot more flexibility and can be closed faster. This fits into PACE Funding’s current strategy of coming to market more frequently with smaller transactions, as opposed to accumulating assets for a larger deal, this person said.