Ygrene Debuts PACE ABS
Ygrene Energy Fund has emerged with its long-anticipated first securitization of Property Assessed Clean Energy (PACE) bonds that finance residential and commercial energy efficiency improvements and upgrades.
The $184.3 million GoodGreen 2016-1 Trust is the first asset-backed public offering by the Santa Rosa, Calif.-based company, since its founding in 2010 to finance bonds through the national PACE program that helps homeowners and business in three states finance solar panel upgrades and other green initiatives to their properties.
Ygrene joins a burgeoning set of other PACE bond finance companies offering the asset class to ABS investors, including Renovate America (which securitizes through its HERO platform) and Renew Finance Group, which securitizes PACE bonds through its Golden Bear trust.
GoodGreen 2016-1 consists of two series of notes, a Class A tranche of $179.4 million and a diminutive Class B series totaling $4.9 million.
The deal has been issued preliminary ratings by Morningstar and Kroll Bond Rating Agency, although only Morningstar applied a preliminary ‘AAA’ rating to the senior notes. Kroll offered only an ‘AA’ to the Class A bonds.
The Class B notes of $4.9 million were rated ‘A’ by Morningstar and ‘BBB’ by Kroll. Morningstar noted that although the B notes pass ‘AAA’ stress scenarios, the lower rating was more appropriate due to low overcollateralization (0.8%) and would receive losses before the Class A notes. An additional limitation is Ygrene’s limited performance history in securitizations.
This pool has 7,761 assessments with an aggregate principal balance of $185 million levied against 6,762 residential and commercial properties in 38 California counties and five Florida counties. The average assessment is $23,841 with a weighted average coupon of 7.9% and weighted average original term of 18.1 years.
Earlier this year, Ygrene revealed plans to potentially complete two securitizations in 2016. Ygrene has previously issued a privately placed securitization.
PACE programs finance energy improvements for residential, commercial and industrial buildings, and are administered through private lenders that are repaid through annual tax levies. The programs are controversial, in that state law places the PACE bond in a first-lien position on a property that contravenes the GSE mortgage guarantees through the Federal Housing Financial Authority – which disallows homeowners with from refinancing or purchasing homes with a PACE lien through Freddie Mac or Fannie Mae.
The possibility, however remote, of Freddie or Fannie attempting to nullify a PACE lien in federal court led Kroll to apply a stress scenario on the mortgages in the pool (about 40%) that are encumbered by a federal GSE guarantee. “As a result KBRA assumed there were no recoveries on the amount that was due in arrears during the assumed period of non-payment on 42.4% of the defaults, which is the equivalent percentage of properties in the portfolio that are encumbered by a Fannie or Freddie lien,” KBRA noted.
Morningstar stated in its cash-flow risk assessment that the risk of Fannie/Freddie objections lay in the FHFA’s policies might complicate homeowners’ attempts to sell or refinance homes with PACE liens – making it possible that homeowners would be forced to prepay the PACE assessments that would impact long-term cash flow to the bonds. “Morningstar did not view these risks as material credit risks.”