Solar energy developer Sunrun is prepping its first securitization of contracts with residential customers, according to a presale from Kroll Bond Rating Agency.
Depending on the timing of issuance, the $111-million deal could be the fourth solar securitization overall and first from an originator other than SolarCity.
Credit Suisse is leading the deal, Sunrun Callisto Issuer 2015-1, which is backed by 7,893 photovoltaic residential solar installations and related contracts. Some 68% of the contracts are power purchase agreements (PPAs); the remaining 32% are lease agreements.
Kroll gave senior notes totaling $100 million an A’ rating, a couple of notches higher than the BBB+’ rating Standard & Poor’s gave the senior tranche of SolarCity’s last transaction, SolarCity LMC Series 2014-2.
The Sunrun deal also has subordinated notes for $11 million in total.
All of the solar assets bundled in the deal have entered into arrangements known as “inverted” or “pass-through” leases. SolarCity's 2014-2 deal also only contained assets that were included in inverted lease arrangements, a departure from the developers first two securitizations.
Inverted lease arrangements are just one way developers can pass the solar Investment Tax Credit (ITC) to investors. The ITC allows residential and commercial developers to offset 30% of their costs. Since developers typically don’t have the tax liability to use these credits for themselves, they bring in “tax equity” investors to capitalize their projects in exchange for use of the credit.
Trade groups such as Solar Access to Public Capital (SAPC) have been promoting the inverted lease as the arrangement that’s most amenable to securitization. Other approaches carry more risk that the tax equity investor will have to face an IRS “recapture” on unvested credits if the assets are pulled into a securitization.
In an inverted lease, also known as a pass-through lease, the sponsor invests in a lessor entity, which owns the assets and enters into a lease agreement with the tax equity investor as lessee.
This causes less friction with recapture, as the tax equity investor receives the credit on the basis of the pass-through election and not because it owns the asset, according to Ronald Borod, senior counsel at DLA Piper.
Having tax equity investors directly own the asset along with the developer is more akin to other arrangements that don’t work as well with securitization.
In an inverted lease the tax equity investor “can continue to receive the benefits of the tax credit even if the ownership of the assets change during the five-year period, provided any subsequent owner of the assets is required to honor the rights of the lessee under the lease,” says Borod.