SFIG Vegas: Look for More Triple-A Rated PACE

Expect to see more bonds backed by Property Assessed Clean Energy Loans that earn top marks from credit rating agencies.

So far, a single deal, from Ygrene Energy Fund, has earned a triple-A rating, and only from a single rating agency, Morningstar Credit Ratings. Kroll Bond Rating Agency, by comparison, assigned an AA to the senior tranche of the deal, which was completed in 2016.

But Ygrene and two other PACE providers represented at the Structured Finance Industry Group’s annual conference in Las Vegas are hopeful that others will follow suit.

Lain Gutierrez, a senior vice president at DBRS, was encouraging. “We’ve seen the performance levels, and they are very stellar performers,” he said.

PACE loans, which can be used to finance a variety of energy efficiency improvements, depending on the state, are backed by assessments levied on the homeowner’s tax bill.

“We were thrilled to be the first ‘AAA’ deal,” Ygrene Chief Executive Stacey Lawson said at the panel Tuesday afternoon. She said the rating was justified by the performance of the firm’s loans, however limited the historical data. There have been no defaults or foreclosures on the $700 million to $800 million of loans that that the company services, and the delinquency rate of 0.4% is five times better than those of prime mortgage products, she said.

Besides a lack of long-term performance data, this relatively new asset class is dogged by regulatory uncertainty and the reluctance of some mortgage lenders to finance homes with PACE liens. They object to the fact that any delinquent PACE payments have a senior claim on the property.

Last year, the Federal Housing Administration said it would insure mortgages on homes encumbered by PACE liens, as did the Department of Veterans Affairs. However the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, still bars the government-sponsored enterprises from insuring homes with PACE liens.

PACE providers have been working with mortgage lenders to obtain lender consent agreements (as required in some states) that provide borrowers with protections from potential default positions with their lender. 

The legal clarity of the loans is crucial to opening up the nationwide PACE market, which for residential loans is as much as a $160 billion market for potential improvements, said Renovate America managing director Craig Braun.

Counting commercial properties – which Greenworks co-founder and chief investment officer, Alexandra Colley pegged as a “hugely untapped” market of 1.5 million upgradable buildings – that national market figure could top $200 billion, according to Ygrene’s Lawson.

Editor's note: the original version of this article misidentified Gutierrez' employer.