The second Trump presidency may seem like a death knell for green securitizations, but it doesn’t have to be. With strong collateral and a ravenous European investor base, the US ABS market should still be able to offer attractive deals in the sectors it pioneered, especially if it wants to stay ahead of its European counterpart.
Early reporting on the US presidential transition indicates that the Trump administration is planning to slash environmental protections and the Biden era's green policies. While much of the Inflation Reduction Act’s tax credits will likely survive in one form or another due to strong support from predominantly Republican states, the Trump team is planning to end the $7,500 tax credit for electric vehicle purchases.
While ABS backed exclusively by electric vehicle finance are rare, prominent EV companies such as Tesla can pull in spreads as tight as 14bp over the I-curve for their car lease securitizations, as recently as October 2024 with TESLA 2024-B.
Removing the subsidy could take the shine off the EV trend and slow down origination of these assets.
Don't mention ESG
A much bigger issue in the background is the Trump team's hostility to considering environmental, social and governance issues when investing — something that threatens the whole raison d'etre of green securitization.
However, this antipathy can only be as strong as market participants allow it to be.
Future Tesla deals are likely to remain popular, due to the brand’s strong reputation and owner Elon Musk’s proximity to Trump.
But one market source said other issuers, not favoured by MAGA enthusiasts, would also still have a chance to remain competitive in the ABS market, as long as they offered good collateral that enabled them to demand strong prices for their paper.
“The perception [of Tesla] is that they are going to continue to be a darling,” said the source. “The best cream will rise to the top with these issuers, as long as they’re issuing good collateral.”
Friends over the water
Even if US investors become shy about buying green securitizations, they will still find demand from European investors with environmental mandates to fulfil.
So far, US green ABS issuers have been able to rely on this, partly because European issuance of these deals has been a trickle.
But US issuers should not take that bid for granted. If European investors cannot get their fill of green securitizations in the US, they will increasingly shift to European deals, which are evolving into a stronger competitor.
Issuers like Enpal have brought to Europe previously US-only products such as solar panel finance ABS.
European ESG securitizations are coming more regularly, with green SRTs from Norwegian bank DNB and Estonian fintech Inbank a couple of weeks ago.
Right now, US issuers have a competitive edge in green securitization. If they give up and stop trying for four years of a second Trump presidency, they are likely to lose it.
When it comes to building an engaged investor base and healthy market ecosystem, absence does not make the heart grow fonder— presence does.