The Western Riverside Council of Governments’ latest securitization of Property Assessed Clean Energy (PACE) bonds is only slightly more geographically diverse than its two previous deals.

HERO Funding Trust 2015-2 will issue $159.8 million of class A notes with a preliminary ‘AA’ rating from Kroll Bond Rating Agency. The notes have an expected maturity of 2035.

Deutsche Bank Securities is the structuring agent; Morgan Stanley is the bookrunner.

The notes are secured by 18 limited obligation improvement bonds issued by the Western Riverside Council of Governments and San Bernardino Associated Governments.

In contrast to the first two transactions, where all of the assessments were located in 11 and 21 counties, respectively, the ones backing this transaction are located in 26 counties.

The portfolio is still heavily concentrated in southern California, however.

According to Kroll, the assessments in the five new counties represent 0.7% of the collateral. And four of the counties represented in the two prior deals, Riverside, San Bernardino, San Diego and Los Angeles, represent a majority of the collateral in the latest deal, approximately 70%.

The PACE portfolio is secured by 7,558 assessments levied against 7,456 residential properties. The average assessment is $21,795 with an average annual payment of $3,024. The transaction benefits from credit enhancement in the form of excess spread, overcollateralization, and a liquidity reserve.

Under California law, PACE assessments have equal lien priority with real estate taxes and other special assessments and are senior to all non-tax liens, including mortgages.

The Federal Housing Finance Agency, the conservator of Fannie Mae and Freddie Mac, believes that they contravene the terms of mortgage insurance provided by the two companies. This means that there is a risk that the FHFA could challenge the validity of a PACE lien in court, resulting in an impairment.

Kroll views this risk as remote, but has nevertheless applied a stress test assuming that the 36% of mortgage in the pool encumbered by Fannie or Freddie mortgages defaulted and had their PACE liens nullified.

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