Renovate America has received its first triple-A rating for a green-bond securitization, after turning to the only agency that has thus far issued AAAs for any asset-backed deal involving Property Assessed Clean Energy bonds.
Morningstar Credit Ratings provided triple-A ratings to two classes of senior notes for the $204.84 million HERO Funding 2017-2 transaction. The capital stack includes a $91 million Class A-1 tranche and a $90.84 million Class A-2 series, both of which were capped at AA by DBRS and Kroll Bond Rating Agency, the only other ratings firms that currently assess public ABS deals from PACE lenders.
None of the 10 prior publicly rated transactions previously issued on Renovate’s Home Energy Renovation Opportunity (HERO) platform since 2013 earned higher than initial AA ratings from either DBRS or Kroll.
But HERO Funding 2017-2 is the first Renovate transaction rated by Morningstar, which granted the PACE industry’s first AAA public rating to Ygrene Energy Funds’ GoodGreen 2016-1 deal last fall. A follow-up Ygrene transaction, the $176 million GoodGreen 2017-1 in April, also carried preliminary senior-note AAA ratings.
Renovate, Ygrene and other firms such as Renew Financial provide financing to property owner for residential and commercial energy and water efficiency improvements. These loans are repaid through semi-annual property tax assessments levied by local government entities, with the proceeds supporting limited obligation bonds securitized through ABS platforms such as HERO and GoodGreen.
Renovate is the largest originator of PACE financing, with more than 100,000 assessments representing more than $2.27 billion in PACE funding for residential property owners in California. Renovate expects 2017 originations of about $1 billion, according to DBRS.
Hero Funding 2017-2 involves 6,255 PACE assessments in 39 California counties, with an average balance of $22,477 to be paid out over an average of 17.4 years. The pool’s collective annual interest rate of 7.32%, the lowest of any of the average coupons of prior collateral pools issued under Renovate’s HERO program (including 8.1% in HERO 2017-1 in April).
The shrinking rate is the result of a bevy of low promotional 2.99% rates that Renovate began offering earlier this year.
The lower rate impacts the available excess spread against the expected combined bond APR (4.5%). DBRS expects excess spread to shrink to 3.07% compared to 4.03% in 2017-1, while KBRA estimates the excess spread at only 2.4%.
But KBRA still determines that level as a “significant” spread difference that along with 3% overcollateralization and a 2% liquidity reserve account represents enough headroom to withstand a AA-rated stress scenario — or in the case of Morningstar, the AAA level.
PACE loans are underwritten to property values, and not consumer credit quality. That's because the lien stays with the property, and not the owner. Since last fall, Renovate America has introduced new underwriting criteria and new disclosure practices to factor into credit-decisioning, including a homeowner’s ability to repay an assessment. But the loans are still issued primarily to homeowners with below-prime scores, with the weighted-average FICO of borrowers remaining flat at 678 in comparison to past HERO deals.
In a new data point only made available this year in pre-sale reports, DBRS notes the “fairly low” delinquency rates of HERO platform assessments, of between only 0.33% and 0.38% for the 2015-2016 tax year.
The transaction’s initial portfolio size is just $140.6 million, but has a target size of $187.46 million that will build up through a prefunding account that will acquire new portfolios of bonds after the deal closing. The transaction also include $23 million in Class B bonds that are unrated by KBRA, and BBB by DBRS and Morningstar.
The bonds in the HERO platform are issued by the Western Riverside Council of Government, the San Bernardino Association Governments and Los Angeles County.
The issuance of HERO 2017-2 comes the same week that Renovate America announced a new $200 million credit facility with Barclays to continue its expansion of the HERO platform in California, Florida and Missouri. It is also on the heels of a crucial legal victory for Renovate, after a federal court dismissed three lawsuits over alleged federal and state violations of disclosure, documentation and fee/rate practices over its PACE financing program.
But the PACE industry still is under pressure from banking industry and GOP congressional officials seeking to curb the program, including a new proposal from the U.S. House budget committee that would prohibit the Federal Housing Administration from acquiring, purchasing or insuring a property encumbered with a PACE lien.
The Federal Housing Finance Agency, which regulates Freddie Mac and Fannie Mae, already restrict guarantees and purchases of mortgages superceded by PACE liens.