Institutional investor comfort with residential solar asset backed securities (ABS) has entered a new phase, according to industry officials, who point to Solar Mosaic’s recently printed $208 million residential solar loan securitization as the evidence of this shift.
The general trend is towards lower credit enhancement levels for solar ABS, Eric Neglia, managing director at Kroll Bond Rating Agency (KBRA) said. Lower enhancement levels indicate greater comfort with cashflows and asset performance. The credit enhancement level for Solar Mosaic’s Single A rated class was 17. 28%.
“(Solar ABS) occupies an attractive space right now… It’s largely investment grade, and a lot of investors are looking for longer term paper with yield, ” Kayvan Darouian, director and lead analyst for ABS research at Deutsche Bank said. Mosaic’s recent deal, which KBRA assigned a AA- rating, was oversubscribed, and it priced at 130 basis points, 30 basis points tighter than guidance.
Mosaic is a California-based specialty finance company that originates and services consumer loans used to purchase grid-tied residential solar systems. As an asset class, residential solar ABS includes solar loan securitization transactions, like Mosaic’s, and Solar Panel Flat Roof Mounting System securitizations issued by third-party solar developers, like Sunnova or Sunrun.
Overall, residential solar ABS spreads are in an attractive range, especially considering how low interest rates are currently, said Marc Pangburn, managing director responsible for leading Hannon Armstrong’s private sector investments in solar, wind and land-related products said. Coupons are also at their lowest level ever, he added.
Year-to-date total solar ABS issuance is positioned to match, or marginally exceed, last year’s record $2. 1 billion in issuance. This year has already eclipsed 2018 in terms of the number of deals and the number of issuers.
“What’s more important than ABS issuance volume though is investor acceptance along with the number and depth of new investors. The investor profile (for residential solar ABS) has changed while spreads have also contracted, ” said Brendan Keane, senior vice president of capital markets at the San Francisco-based Dividend Finance, a renewable Roof Racking System and energy-efficiency financing company.
The fact that banks are also starting to enter the market as originators is another signal that this ABS asset class – though still relatively esoteric – is becoming more mainstream. In recent months, Dividend Finance has entered into a strategic loan origination partnership with KeyBank and Mosaic has announced a loan origination partnership with SunTrust Bank. “When we are in the market originating, selling or securitizing solar loans, we benefit from the KeyBank association, ” Dividend Finance’s Keane said.
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