“The increase in PACE origination volume, especially this year, is causing banks that haven’t fully engaged in PACE to start looking at how to get involved in the sector,” a source familiar told GlobalCapital on Thursday. “I think the recent influx of new deals have caused some people, including HSBC, to start taking the asset class more seriously.”
The source added that HSBC's prospective role in the market has not yet been determined, but that the bank is assembling a team to research potential opportunities in either underwriting and arranging PACE bonds or providing financing to the platforms themselves.
PACE ABS has had a breakout year in 2016, in both loan origination and securitization volumes. According to data from industry group PACENation, cumulative residential PACE financing stood at $2.2bn as of mid-2016, while securitization volume is almost $2bn to date.
HSBC’s involvement in PACE would not be the bank’s first foray into the green bond sector. It is also a member of the International Capital Market Association’s (ICMA) executive committee for the green bond principles, which some PACE issuers, such as Renew Financial, have used as a road map to getting "green" designation for their deals.
A spokesperson for HSBC declined to comment on the bank's plans for the sector.
PACE market participants expressed mixed views over the timing of HSBC's entry into the market, with one executive at a renewables finance firm telling GlobalCapital that the industry is crowded with institutional players.
“They’re behind the times if they’re still at the research level on PACE,” he said.
Others welcomed HSBC’s move, stating that the industry still has room to grow on both the residential and commercial side of the business.
“The first movers have already moved into the space, whether they’re running financing programs for platforms, [providing] warehouse facilities or underwriting bonds. But PACE as an asset class is going to become much bigger. In the scheme of things, we’re still in the relatively early days of PACE,” the head of a PACE issuer said.
GlobalCapital reported in March that Guggenheim and Credit Suisse were looking to break into the asset class as bookrunners, an area mostly dominated by Natixis, Deutsche Bank and Morgan Stanley. Meanwhile, banks with large mortgage portfolios were also said to be avoiding the asset class so as to avoid conflicts with the Federal Housing Finance Agency (FHFA). The regulator of the government sponsored enterprises (GSEs) Freddie Mac and Fannie Mae does not recognise PACE liens as senior to mortgage payments and has not authorised the GSEs to purchase mortgages that include a senior PACE lien on the property.
The growth of PACE, especially as a sub-sector of ABS, has primarily been fuelled by growing investor interest ranging from hedge funds to insurance companies over the last two years. Renew Financial’s Golden Bear offering, which was priced earlier this week, saw mostly real money buyers snapping up the bonds. This is reflects a growing familiarity with the asset class and the collateral backing the bonds, sources say.