solar securitization: leveraging alternative financing
TRANSCRIPT
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have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.
THURSDAY, JUNE 18, 2020
Darin Lowder, Partner, Foley & Lardner, Washington, D.C.
Marc S. Reisler, Principal, Sive Paget & Riesel, New York
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For additional information about continuing education, call us at 1-800-926-7926
ext. 2.
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If you have not printed the conference materials for this program, please
complete the following steps:
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June 18, 2020
• Managing Risk / Back-Up Arrangements
• Future of Solar Securitization
7
Securitization Overview
• Securitizations pool financial assets (receivables) from an Originator into a bankruptcy-remote special- purpose vehicle (SPV or Issuer) that issues securities to investors • “True Sale” of assets by Originator and
opinion of non-consolidation of Issuer in the event of an Originator bankruptcy
• Note purchase agreement
• Separate Originator management or servicing agreement with Issuer and Indenture Trustee to manage assets and payment servicing
• Back-up servicer / manager
• O&M Provider
• Rating Agency Process
• Securitization Benefits
• Risk diversification
• U.S. Securitization Market
11
• Kroll Bond Rating Agency (KBRA) forecasts 2020 issuance to be relatively flat (or slightly up) from 2019. • The growth in residential solar loan
ABS in past 4 years has been dramatic
Residential Solar Securitization Market Share Down From Peak
12
• Residential Non-ABS Financing Sources Growing • About half (47%) of residential solar
originations were sold to 144A or public securitizations
• $1.5 billion out of $3.2 billion in 2019
Solar Securitization: Key Terms
• 2020 – four solar securitization transactions closed or on deck for over $900 million
• 2019
• classes of debt with rates ranging from 2.88% to 7.14%
• Ratings range from AA- to B
• Advance rates increased from ~60- 70% of Aggregate Discounted Solar Asset Balance several years ago to ~70-80% recently
Source: KBRA, various news reports, industry sources
13
14
Source: Loanpal Solar Loan 2020-1 Ltd. And Loanpal Solar Loan 2020-1 LLC, Structured Finance, ABS New Issue Report, June 9, 2020
Tax Equity Overview / Transaction Structures
15
• A source of capital for solar project finance
• Federal tax credits made available to project owners to encourage solar development
• Investment Tax Credit
• Originally 30% of qualifying costs
16
Tax Equity • ITC Step-down: based on the year construction commences
• 2020 - 26%
• 2021 – 22%
• No credit for residential solar after 2021
17
• Monetizing the ITC
• Developers do not have the tax liability to make full use of the tax credits
• Tax equity investors have large tax appetites and invest for return based partially on the value of tax credits
• Revenue Procedure 2007-65 and Announcement 2009 – 69 established safe harbor for allocation of tax credits in a partnership structure if certain conditions are followed.
• Participation in credits and project cash flow
• Investor and developer minimum interest in project gain and cash flow
• A minimum unconditional investment prior to the date the project is placed in service
• 5-year recapture period – ownership cannot be disturbed
18
19
• Partnership Flip Features:
• Tax Equity provides remaining capital (usually ~40%) to ProjectCo
• ProjectCo builds project(s) (or has them built and purchases them)
• Customer makes payments
• ProjectCo distributes most of ITC and tax profit (or loss) to Tax Equity Investor (99%), plus enough cash to get it to its target IRR at the flip
• Fund distributes remaining ITC and tax profit (or loss) to Sponsor (1%), plus all remaining cash
20
• On the Flip Date:
• Most cash, tax profit (or loss) is distributed to the Sponsor (usually 95%)
• Sponsor has the right to purchase Tax Equity’s remaining interest at fair market value.
• Flips:
• Fixed – Flips on a certain date
• Yield Based – Flips once Tax Equity has received its target IRR
21
22
• Inverted Lease Features: • Developer and Tax Equity make capital
contributions to Lessee (so they own 1% and 99%, respectively)
• Developer contributes solar system or makes a capital contribution to Lessor so that it owns 51%
• Lessee makes capital contribution to Lessor so it owns 49%
• Lessor makes capital contribution to Developer
• Lessor leases system to Lessee. Lessor also makes election to pass through ITC benefits to Lessee
• Lessee sub-leases to Customer. Customer makes monthly payments to Lessee, which “passes through” a portion of them to Lessor
• Developer and Tax Equity take 1% and 99% of ITC, respectively, in proportion to their ownership of Lessee
• Developer and Tax Equity Investor take 51% and 49% of taxable income/loss (including depreciation benefits), in proportion to their ownership of Lessor
23
• Holdco/Back Leverage Debt
• Must be structured to accommodate the needs of tax equity investors
• Debt is available for construction, operation, or both
• May be secured by sponsors’ equity interest in the manager of the tax equity partnership
• Entails negotiation with tax equity to assure no tax recapture event
24
• Credit enhancement • Overcollateralization – additional assets
are added to secure the obligation in excess of the amount of the obligations
• Yield supplement overcollateralization – protection against lower yielding assets
• Subordination – payment of higher rated senior tranches prior to lower rated junior tranches
• Excess spread – the difference between the interest rate on the underlying loans and the securitization coupon
• Reserves
28
• Used where securitized assets are residential solar loans
• When borrowers receive the ITC – an obligation to prepay their loans
• Alternative: revised loan amortization schedule or increased interest rate
• Seasoning • Assets may be placed into a securitization
pool after several months of performance
• However, does not always improve risk
29
• Warranties
• System manufacturers warrant the ability of their systems to generate a certain amount of power over a specific period
• O&M services providers warrant the performance of the systems under their management to a certain level of production
• Guaranties
• Installers provide production guaranties – kick in if the system fails to generate at a specific rate over a specific period
30
• Repurchase Obligation • Securitization investors take obligor risk,
but they do not take the risk that the underlying assets fail to meet the criteria for the asset pool.
• Representations concerning the “eligibility” of the asset are made for the benefit of the investors – The sponsor has an obligation to repurchase from the asset pool any non-conforming assets. Typical eligibility criteria include:
• Complete and correct loan file
• Properly executed and stored with custodian
• Perfection process was followed
• Asset is freely assignable
• Proper insurance
• FICO score of the obligor is within the eligible range
31
avoid the bankruptcy of the sponsor
• A sponsor bankruptcy can still have a significant impact on the securitization
• Sponsor as financial servicer
• Sponsor reputation, continued business operation
• Rating downgrades
• Due to the large size of pooled assets in securitization, remediation of bankruptcy-related problems is more challenging
32
• Back-Up Features • Securitizations incorporate back-up
features to remediate risk related to the sponsor and other service providers
• Back-up financial servicer
• Back-up arrangements are designed for a smooth transition
• Back-up service providers are regularly provided with performance and operational data to take over service functions
• Securitization financial models contemplate replacement of service providers with back-up providers
• Back-up services are coordinated with other service providers, such as custodians, to facilitate a smooth transition
• Compliance issues – residential solar
34
35
Comparison of Securitization v. Alternative Debt Facilities
• Post-Covid, Vivint Solar’s securitization plan dried up in Q1 2020
• Plan B: Alternative access to liquidity • New Holdco Loan with Brookfield
Asset Management Infrastructure Debt Fund at end of May ($300 mm)
• Expansion of existing warehouse facility with commercial banks at end of May ($275 mm)
• Short-term debt with pricing similar to recent securitizations
• All-in rates of 4.4%
37
Source: Power Finance & Risk, Vol. XXIII, No. 23, June 15, 2020
Comparison of Securitization v. Alternative Debt Facilities
• 2020 Financing terms similar in pricing across securitization and alternative loan facilities
38
2018 Vivint Securitization
$466 mm (Class A - $400 mm Class B – $66 mm)
10 years
2020 Vivint Holdco Loan
$245 mm 4 years L+310 bp (increased from 237.5)
2020 Pending Mosaic Securitization
$271 mm (4 tranches)
N/A BB tranche – 737-750 bp over swaps
Source: Power Finance & Risk, Vol. XXIII, No. 23, June 15, 2020
Securitization: Looking ahead
• Strategic Partnerships to source debt:
• Mosaic partnered with SunTrust
• Dividend partnered with KeyBank
• Increasing standardization (large portfolios of pooled assets)
• Continued Competitive Solar Financing Options
• Private placements with long tenors, fixed rates
• Flexible commercial loan terms (warehouse facilities, holdco loans)
40
Suite 600 Washington, DC 20007
202.295.4084
42
New York, NY 10022 212.421.2150
The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.
THURSDAY, JUNE 18, 2020
Darin Lowder, Partner, Foley & Lardner, Washington, D.C.
Marc S. Reisler, Principal, Sive Paget & Riesel, New York
Tips for Optimal Quality
Sound Quality
If you are listening via your computer speakers, please note that the quality
of your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory, you may listen via the phone: dial
1-877-447-0294 and enter your Conference ID and PIN when prompted.
Otherwise, please send us a chat or e-mail [email protected] immediately
so we can address the problem.
If you dialed in and have any difficulties during the call, press *0 for assistance.
Viewing Quality
To maximize your screen, press the ‘Full Screen’ symbol located on the bottom
right of the slides. To exit full screen, press the Esc button.
FOR LIVE EVENT ONLY
Continuing Education Credits
In order for us to process your continuing education credit, you must confirm your
participation in this webinar by completing and submitting the Attendance
Affirmation/Evaluation after the webinar.
A link to the Attendance Affirmation/Evaluation will be in the thank you email
that you will receive immediately following the program.
For additional information about continuing education, call us at 1-800-926-7926
ext. 2.
Program Materials
If you have not printed the conference materials for this program, please
complete the following steps:
• Click on the link to the PDF of the slides for today’s program, which is located
to the right of the slides, just above the Q&A box.
• The PDF will open a separate tab/window. Print the slides by clicking on the
printer icon.
June 18, 2020
• Managing Risk / Back-Up Arrangements
• Future of Solar Securitization
7
Securitization Overview
• Securitizations pool financial assets (receivables) from an Originator into a bankruptcy-remote special- purpose vehicle (SPV or Issuer) that issues securities to investors • “True Sale” of assets by Originator and
opinion of non-consolidation of Issuer in the event of an Originator bankruptcy
• Note purchase agreement
• Separate Originator management or servicing agreement with Issuer and Indenture Trustee to manage assets and payment servicing
• Back-up servicer / manager
• O&M Provider
• Rating Agency Process
• Securitization Benefits
• Risk diversification
• U.S. Securitization Market
11
• Kroll Bond Rating Agency (KBRA) forecasts 2020 issuance to be relatively flat (or slightly up) from 2019. • The growth in residential solar loan
ABS in past 4 years has been dramatic
Residential Solar Securitization Market Share Down From Peak
12
• Residential Non-ABS Financing Sources Growing • About half (47%) of residential solar
originations were sold to 144A or public securitizations
• $1.5 billion out of $3.2 billion in 2019
Solar Securitization: Key Terms
• 2020 – four solar securitization transactions closed or on deck for over $900 million
• 2019
• classes of debt with rates ranging from 2.88% to 7.14%
• Ratings range from AA- to B
• Advance rates increased from ~60- 70% of Aggregate Discounted Solar Asset Balance several years ago to ~70-80% recently
Source: KBRA, various news reports, industry sources
13
14
Source: Loanpal Solar Loan 2020-1 Ltd. And Loanpal Solar Loan 2020-1 LLC, Structured Finance, ABS New Issue Report, June 9, 2020
Tax Equity Overview / Transaction Structures
15
• A source of capital for solar project finance
• Federal tax credits made available to project owners to encourage solar development
• Investment Tax Credit
• Originally 30% of qualifying costs
16
Tax Equity • ITC Step-down: based on the year construction commences
• 2020 - 26%
• 2021 – 22%
• No credit for residential solar after 2021
17
• Monetizing the ITC
• Developers do not have the tax liability to make full use of the tax credits
• Tax equity investors have large tax appetites and invest for return based partially on the value of tax credits
• Revenue Procedure 2007-65 and Announcement 2009 – 69 established safe harbor for allocation of tax credits in a partnership structure if certain conditions are followed.
• Participation in credits and project cash flow
• Investor and developer minimum interest in project gain and cash flow
• A minimum unconditional investment prior to the date the project is placed in service
• 5-year recapture period – ownership cannot be disturbed
18
19
• Partnership Flip Features:
• Tax Equity provides remaining capital (usually ~40%) to ProjectCo
• ProjectCo builds project(s) (or has them built and purchases them)
• Customer makes payments
• ProjectCo distributes most of ITC and tax profit (or loss) to Tax Equity Investor (99%), plus enough cash to get it to its target IRR at the flip
• Fund distributes remaining ITC and tax profit (or loss) to Sponsor (1%), plus all remaining cash
20
• On the Flip Date:
• Most cash, tax profit (or loss) is distributed to the Sponsor (usually 95%)
• Sponsor has the right to purchase Tax Equity’s remaining interest at fair market value.
• Flips:
• Fixed – Flips on a certain date
• Yield Based – Flips once Tax Equity has received its target IRR
21
22
• Inverted Lease Features: • Developer and Tax Equity make capital
contributions to Lessee (so they own 1% and 99%, respectively)
• Developer contributes solar system or makes a capital contribution to Lessor so that it owns 51%
• Lessee makes capital contribution to Lessor so it owns 49%
• Lessor makes capital contribution to Developer
• Lessor leases system to Lessee. Lessor also makes election to pass through ITC benefits to Lessee
• Lessee sub-leases to Customer. Customer makes monthly payments to Lessee, which “passes through” a portion of them to Lessor
• Developer and Tax Equity take 1% and 99% of ITC, respectively, in proportion to their ownership of Lessee
• Developer and Tax Equity Investor take 51% and 49% of taxable income/loss (including depreciation benefits), in proportion to their ownership of Lessor
23
• Holdco/Back Leverage Debt
• Must be structured to accommodate the needs of tax equity investors
• Debt is available for construction, operation, or both
• May be secured by sponsors’ equity interest in the manager of the tax equity partnership
• Entails negotiation with tax equity to assure no tax recapture event
24
• Credit enhancement • Overcollateralization – additional assets
are added to secure the obligation in excess of the amount of the obligations
• Yield supplement overcollateralization – protection against lower yielding assets
• Subordination – payment of higher rated senior tranches prior to lower rated junior tranches
• Excess spread – the difference between the interest rate on the underlying loans and the securitization coupon
• Reserves
28
• Used where securitized assets are residential solar loans
• When borrowers receive the ITC – an obligation to prepay their loans
• Alternative: revised loan amortization schedule or increased interest rate
• Seasoning • Assets may be placed into a securitization
pool after several months of performance
• However, does not always improve risk
29
• Warranties
• System manufacturers warrant the ability of their systems to generate a certain amount of power over a specific period
• O&M services providers warrant the performance of the systems under their management to a certain level of production
• Guaranties
• Installers provide production guaranties – kick in if the system fails to generate at a specific rate over a specific period
30
• Repurchase Obligation • Securitization investors take obligor risk,
but they do not take the risk that the underlying assets fail to meet the criteria for the asset pool.
• Representations concerning the “eligibility” of the asset are made for the benefit of the investors – The sponsor has an obligation to repurchase from the asset pool any non-conforming assets. Typical eligibility criteria include:
• Complete and correct loan file
• Properly executed and stored with custodian
• Perfection process was followed
• Asset is freely assignable
• Proper insurance
• FICO score of the obligor is within the eligible range
31
avoid the bankruptcy of the sponsor
• A sponsor bankruptcy can still have a significant impact on the securitization
• Sponsor as financial servicer
• Sponsor reputation, continued business operation
• Rating downgrades
• Due to the large size of pooled assets in securitization, remediation of bankruptcy-related problems is more challenging
32
• Back-Up Features • Securitizations incorporate back-up
features to remediate risk related to the sponsor and other service providers
• Back-up financial servicer
• Back-up arrangements are designed for a smooth transition
• Back-up service providers are regularly provided with performance and operational data to take over service functions
• Securitization financial models contemplate replacement of service providers with back-up providers
• Back-up services are coordinated with other service providers, such as custodians, to facilitate a smooth transition
• Compliance issues – residential solar
34
35
Comparison of Securitization v. Alternative Debt Facilities
• Post-Covid, Vivint Solar’s securitization plan dried up in Q1 2020
• Plan B: Alternative access to liquidity • New Holdco Loan with Brookfield
Asset Management Infrastructure Debt Fund at end of May ($300 mm)
• Expansion of existing warehouse facility with commercial banks at end of May ($275 mm)
• Short-term debt with pricing similar to recent securitizations
• All-in rates of 4.4%
37
Source: Power Finance & Risk, Vol. XXIII, No. 23, June 15, 2020
Comparison of Securitization v. Alternative Debt Facilities
• 2020 Financing terms similar in pricing across securitization and alternative loan facilities
38
2018 Vivint Securitization
$466 mm (Class A - $400 mm Class B – $66 mm)
10 years
2020 Vivint Holdco Loan
$245 mm 4 years L+310 bp (increased from 237.5)
2020 Pending Mosaic Securitization
$271 mm (4 tranches)
N/A BB tranche – 737-750 bp over swaps
Source: Power Finance & Risk, Vol. XXIII, No. 23, June 15, 2020
Securitization: Looking ahead
• Strategic Partnerships to source debt:
• Mosaic partnered with SunTrust
• Dividend partnered with KeyBank
• Increasing standardization (large portfolios of pooled assets)
• Continued Competitive Solar Financing Options
• Private placements with long tenors, fixed rates
• Flexible commercial loan terms (warehouse facilities, holdco loans)
40
Suite 600 Washington, DC 20007
202.295.4084
42
New York, NY 10022 212.421.2150