SolarCity, the largest residential solar developer, is coming out with its fourth securitization for $123.5 million.
The way the transaction tackles a tax credit used to finance the projects is a departure from the previous securitization in this sector, by Sunrun, as well as from SolarCity’s prior deal completed a year ago.
This time around SolarCity bundled assets — consisting of leases and power purchase agreements between the company and homeowners using its solar panels — financed via tax partnerships between the developer and three investors: American Honda Motor, Solar TC Corp. and Capital One.
This arrangement, known as a flip partnership, is one of the approaches used to transfer the 30% investment tax credit (ITC) enjoyed by solar installers to companies with higher tax liabilities.
SolarCity’s last deal, 2014-2, and Sunrun Callisto Issuer 2015-1, both used the arrangement known as inverted lease. This is the approach that supporters of securitization have said is most amenable to an asset-backed.
One of the risks to investors in a solar securitization is that the Internal Revenue Service could determine that the fair market value of the photovoltaic (PV) systems backing the deal was somehow inflated; in this case, the ITC would commensurately drop. The IRS would then seek to “recapture” the unvested credits and the tax equity investors would seek to be reimbursed.
This gets even more complicated if the assets are bundled into a securitization,
In the case of SolarCity Series 2015-1, SolarCity itself has agreed to make good on any recaptured tax credit. If for any reason SolarCity can’t cover the lost benefit, two insurers — Underwriters at Lloyd’s, London and Columbia Casualty Company — will cover up to 35% of the ITC claimed by the tax partnerships. Kroll believes the risk is very low that extra payments triggered by an IRS recapture would exceed 35% of the credit.
The transaction is divided into a $103.3-million A tranche and $20-million B tranche. The final maturity date is 8/21/2045.
Kroll’s expected rating is A’ on the A notes and BBB’ on the B notes.
The weighted average FICO score of the homeowners in the securitized pool is 742, considered well into prime territory.
Discounting the leases and PPAs behind the deal, the agency came up with an overcollateralization — the amount by which the underlying assets exceed the notes — of 32.1%. By value, 55.9% of the pool is PPAs and 44.1% leases. All the contracts have a 20-year term.
While SolarCity has enjoyed very low delinquencies in its contracts — for instance, receivables over 180 days past due were 0.56% of total billings over the previous fiscal year — the company’s track record is slim. While it started up in 2006, over 50% of its installations were made last year.
There’s a geographic risk as well. Some 46.3% of the homeowners in the 2015-1 pool are in California, making the deal especially vulnerable to a housing downturn in that state.
This deal could be the fifth solar securitization, as so far only SolarCity and Sunrun have issued deals.