Panellists at ABS East on Monday chalked that up to a host of issues facing the sector.
“[There has not been] a lot of issuance activity in 2016,” said Roger Barod , senior counsel at DLA Piper. “My read is that a lot of the solar sponsors are finding other sources of capital. Some are waiting to hit that magical scale point where they can go into the securitzation market. There are deals forming, but there is a slowdown of issuance.”
Like all securitized assets classes, risk retention has created a big question mark for solar finance shops looking to tap the ABS markets. According to Barod , sponsors may have to expand their representations and warranties to include a statement saying that they have complied with risk retention. Moreover, deals are often structured as a partnership between the sponsor and the tax equity investor, which raises the question of who is ultimately responsible for holding the risk.
“People are staying away from horizontal risk retention because it is too hard to calculate. Does that mean everyone will flock to vertical risk retention? What does that do to the structure of solar securitizations? It is unexplored territory,” Barod said.
The landscape of solar finance has changed over the course of the last two years, panellists said, as lease and power purchase agreements become less common and are replaced by loans financing the ownership of residential solar panels. This has raised other questions about the likelihood of non-payment for these deals versus those backed by leases or PPAs.
“It is really important to understand the market,” said Billy Parish, chief executive of solar finance company Mosaic, which is the largest residential solar lender in the US. “We’ve seen two segments of solar buyers, similar to mortgages. One segment is focused on monthly cash flow and prefers a 20-30 year loan, and then [there are] folks who think of it more as an investment and like 15 year loan products,” Parish said.
He added that he expects Mosaic to be a frequent issuer of solar ABS in the future.
The panel noted that the shift towards loans can be attributed to the benefits of ownership, with the homeowner building equity in the system over time and also adding value to the home. Borrowers can expect their homes to appreciate by approximately one-and-a-half to two times the cost of the system, the panellists said.
“Building equity is a pretty big driver for this. There is a better alignment of interests in the loan product. Someone puts significant dollars in the system and it becomes an asset, not a liability,” said Steve Michella , co-founder and chief executive of solar lender Dividend Solar.
S&P Global Ratings’ director Jesse Sable echoed that, stating: “From an investor standpoint, I agree that the loan product is a lot easier to understand. Just having a very simple payment stream could make it a lot more transparent.”