Renew Financial has introduced a new feature in its next securitization of Property Assessed Clean Energy: A prefunding account.

The $206 million transaction will initially be backed by 4,297 assessments levied against 4,184 residential properties in 41 California counties and 12 Florida counties. These voluntary assessments are enabled by state legislation and were used to fund energy and water efficiency upgrades on the properties.

Some $62.8 million of proceeds from the transaction will be set aside to acquire additional assets by Jan. 24, 2018. Prefunding accounts generally introduce additional risk into deals, since they can introduce some drift in the overall characteristics of the collateral pools. However any assessments acquired after the close of the deal must meet certain criteria.

The latest deal features slightly higher exposure to Florida, where Renew has not been operating as long as it has in California. The sunshine state accounts for 7.3% of the assets of the latest deal; that’s up from 3.2% in the prior deal, completed in April. Since the securitization trust has another three months to acquire additional collateral, the mix in the latest deal could change, however.

renew financial 2017-2 securitization collateral

The average PACE Assessment is approximately $27,156 with an average annual payment of approximately $3,011.

As with the April transaction, Renew has committed to buy back any PACE assessment that does not confirm to certain transaction guidelines should this have an adverse effect on noteholders. This feature did not exist in earlier deals.

The new deal, Renew 2017-2, will issue a $174.1 million senior tranche of notes with preliminary AA ratings from Kroll Bond Rating Agency and DBRS with an expected maturity of September 2048. There are also two subordinate tranches, $5.4 million of notes rated A and $27 million notes rated BBB by DBRS alone.

Credit enhancement consists of excess spread, or the difference between the weighted average interest rate of the assets and the interest rate on the notes, overcollateralization and a liquidity reserve account. Kroll’s analysis assumes the notes will pay 4.50%, resulting in 3.70% of initial excess spread available to cover losses.

In addition, the aggregate principal balance of the assets will exceed the notes being issued by 3%.

There will also be a reserve account equal to 1% of the initial portfolio.

Natixis Securities, Morgan Stanley and Barclays Capital are the initial purchasers.

Among the risks to the deal is the minimal amount of data on the historical PACE assessment defaults or foreclosures. Kroll relied instead on historical residential real estate tax default data for the counties where the properties subject to the PACE.

Other risks cited by both Kroll and DBRS include the risk that counties collecting assessments on behalf of Renew could go bankrupt, and heightened regulatory scrutiny on the PACE industry.

Renew is headquartered in Oakland, Calif.; to date it has completed six securitizations. The firm has also raised some $237 million in equity capital, with $114 million raised during 2017. Renew’s equity partners include Prelude Ventures, Blue Mountain Capital, Angeleno Group, Apollo Investment Corp., NGEN Partners and Claremont Creek Ventures.

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