Last week, we were invited to participate in the Infocast Solar Capital Markets Conference in New York City. The event was well attended by issuers, underwriters, lenders, and service providers with lots of great discussion about the current and future state of the solar capital markets. We distilled the discussion to three key takeaways from the conference:
Bespoke Transactions: Five securitizations have been issued so far; the first two securitizations were Cash Grant deals, and thus did not have the complications of tax-equity. These were followed by two deals that utilized lease pass-through structures, and the latest deal by SolarCity was providing leverage to partnership-flip transactions. Since each structure has unique impacts on the cash flow profile, each deal had to be written nearly independently. The latest SolarCity deal even had multiple tax-recapture insurance policies that had to be customized for each of their underlying partnership-flip deals. In short, these deals took longer and cost more to underwrite than should be expected in the future of the industry. Participants agreed that a simpler capital stack without tax-equity should increase efficiency for future transactions. Securitizations can take 3x longer to close than bank financing in today’s market.
Ratings Agency Perspectives: Each of the ratings agencies commented on how they addressed the lack of historic operating data. A few interesting themes emerged.
First, a distinction was made between a customer’s ability to pay and their willingness to pay. While utility bills could be considered a proxy for ability to pay, it says nothing about the customer’s value proposition. Moody’s commented that there isn’t a proxy for willingness to pay for a solar transaction, and thus meeting the customer’s value proposition of saving money is critical.
Second, while losses from other markets are used as a proxy, solar is unique in that the system is attached to the home. We are in a tight credit environment where only high-quality borrowers are qualifying for solar systems and mortgages. The agencies expect another (looser) credit cycle to reduce the credit requirements for new mortgages, and thus that the credit quality of these portfolios will decline dramatically; Kroll said that they double the loss rates of their proxy portfolios to account for this credit deterioration.
Third, the agencies assume that renegotiations over the course of these transactions and believe that customers will be comparing their transaction against the lesser of prevailing utility rates and new PPA contracts in the future.
Data Transparency Can Lead to Liquidity: It was generally agreed that two types of data can help unlock liquidity in the market. First, the industry just needs to continue operating and seeing how these deals perform; as 20-year contracts, there is an inherent lack of data that shows how consumers will behave over the life of the transaction. The second type of data related to the existing data that has been collected in the industry. The lenders into securitizations specifically indicated that greater data transparency would lead to better liquidity and reduced interest rates, and we are proud that they highlighted kWh Analytics as uniquely positioned to provide this service.
We are excited to see where the securitization market moves and other ways that we can support these transactions with reliable, granular industry benchmarking data. The cumulative solar ABS issued to date is only $660 million, while $180 billion of asset-backed securities were issued in just the last year. The capital markets are poised to grow as deal structures become simpler, solar loans increase in volume, and data is more readily available on how these transactions perform across the industry.