Solar panel loans may be riskier than related assets such as leases and power purchase agreements, but that doesn’t mean that solar loan securitization will necessarily be riskier.
Kroll Bond Rating Agency, for one has no cap on its rating of solar loan securitization.
True, the agency assigned a lower rating – ‘BBB’ – to the senior tranche of SolarCity’s first loan securitization than it has to senior tranches of the sponsor’s three previous deals, which were backed by leases or PPAs. But that’s because of the way that SolarCity chose to structure the deal.
Andrew Giudici, managing director of the project finance and RMBS teams at KBRA, said the risk profile of SolarCity’s in-house loans was not the sole determinant of the deal’s rating. “It’s how much leverage they want to put in a transaction that dictates how high the ratings can be,” he said.
In this case, SolarCity opted to put 40% equity into the deal, dubbed of SolarCity FTE Series 1, LLC, Series 2015—A, resulting in an advance rate of 60%. The trust issued $151.6 million of class A notes that are secured by a $249.5 million portfolio of loans.
The notes could have achieved higher rating, despite the riskier collateral, had the sponsor kept more equity to the transaction, Giudici said.
Different Risk Profile
Giudici said the fact that borrowers are responsible for panel maintenance isn’t the only reason MyPower loans, which are offered directly by SolarCity for the purchase of solar panels, are riskier than solar leases or PPAs. The loans also have longer terms, 30 years compared with 20 years for leases and PPAs.
The additional 10 years increases the risk that the customer will experience operational issues with the panels. KBRA assumed that, after year 25, the panels will experience increased operational issues and as a result doubled the degradation assumptions in the transaction, Giudici said.
For example, inverters, which convert sunlight into electricity, typically have to be replaced every 10 to 12 years. In other words, borrowers are looking at replace inverters twice before the loan is paid in full. The cost of inverter replacement is typically around $1,400 per unit.
Under the lease and PPA deals, borrowers were looking at that cost only once during the life of the transaction.
On the plus side, SolarCity doesn’t have to worry about the securitization jeopardizing any tax equity credit. At the federal level, the Investment Tax Credit (ITC) allows both residential and commercial developers to offset 30% of their costs. Developers typically do not have the tax liability to use these credits for themselves, so they typically bring in “tax equity” investors to capitalize their projects in exchange for use of the credit. But the ITC is being phased out, which is one of the reasons that there is so much interest in securitization as an alternative source of financing.
SolarCity pioneered the inverted lease, also known as a pass-through lease, where it invests in a lessor entity, which owns the assets and enters into a lease agreement with the tax equity investor as lessee.
That’s not an issue for this deal. With MyPower loans, it’s the borrower that benefits from the 30% tax credit, not a third party investor. “So here the owner retains the tax credit that they can utilize,” said Giudici. “Because there is no tax equity involved … it is cleaner than some of SolarCity’s previous deals.”
Otherwise the loans are very similar to PPAs. The borrower pays only for the energy produced by the system during a given period, and like the leases, the loans benefit from a minimum performance guarantee payment from SolarCity. Under the loan agreement, the borrower is still on the hook to repay the loans even if the PV system underperforms for an extended period over the tenor of the loan. The repayment profile would result in a balloon payment at maturity. If there is a balance at the end of 30 years, SolarCity grants the customer two additional years to pay the outstanding balance.
While the latest deal breaks new ground, it may not be a trendsetter.
Giudici said that it is likely that, in the short term, the predominant product backing solar ABS will continue to be leases and PPAs. “PPA and leases have been around longer and the market will continue to see volume of these in short term but overtime we will see more solar loan securitizations as well,” he said.