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How to Prepare Your Solar Portfolio for Securitization – Part Two: Key Challenges

Posted by Administrator on 10/1/14 4:47 AM

 

As we noted in Part One of our series explaining how to prepare a solar portfolio for securitization, we originally published a variation of this post as an Industry Current in Power Finance & Risk.

This post discusses key challenges for securitizations.

Key Challenges

The solar industry will need to manage several challenges before entering the market with ratings high enough to attract the lowest cost capital (ideally higher than the A to AA range expected of the initial solar securitizations).

· Scale and Geographic Diversity. For securitization to work, assets must hit a critical mass and must be pooled from over a geographically-diverse area, such as numerous states in different regions. This reduces the risk that regulatory regimes and market forces will materially effect the value of solar assets in the pool.

· Standardization of Asset Structures and Documentation. It will be absolutely vital to manage the structure and supporting documentation of assets in a far more consistent manner than has historically been done in the industry (with the notable exception of certain retail aggregators over the past couple of years). Pools will need to be standardized in order for underwriters and investors to have comfort in the underlying revenue streams without needing to consider a diverse range ownership structures and contractual terms.

· Off-take Risk. Most residential solar sponsors manage off-take risk by limiting their eligible pool of potential customers to homeowners with a minimum FICO score. For sponsors selling power to commercial and industrial (C&I) customers, off-take risk is managed in a less standardized way, which makes the C&I solar asset more difficult to securitize. A recent report shows that 25 leading corporations in the United States have installed a total of 445 MW of solar facilities, so sponsors are managing off-take risk by installing solar on multiple sites of large rated and creditworthy counterparties.

· Technology Risk. Distributed solar asset revenue streams have tenors of 15 to 20 years, but there is currently less than 10 years of historical data upon which to rate the performance of most solar panels. Passage of time and improved operating data will enable further de-risking of solar securities.

· Sponsor Risk. Sponsors are still relatively new to the market. Even leading sponsors who are likely to securitize their assets such as Solar City, SunRun, Sungevity, and Viridity have been operational for less than a decade. One way to overcome sponsor risk is to take the approach that Solar City is pursuing as it prepares an initial securitization – i.e., put in place a backup service agreement to ensure that if the sponsor is not able to service its agreements, there will be a well-rated, larger company to take over.

· Market Risk. There is also the risk that solar energy might be less economical than traditional energy sources during the tenor of the asset. Sponsors will need to find ways to convince the capital markets that their solar assets will continue to generate electricity at a price that is competitive to traditional energy, or find other ways to ensure that market risk won’t jeopardize the value of the asset. While hedges on the aggregated pool of assets may offer a short-term solution, the duration of any available hedge (generally 3 to 7 years) will typically be much shorter than the tenor of the asset.

· Regulatory Risk. In order to facilitate the growth of solar securitizations, government agencies will need to update regulations, such as disclosure and liability rules. Also, assignee rights under government energy programs such as net metering rules may need to be updated to ensure that investors in solar securitizations are protected against risk of obligor default. The government may also provide credit enhancement through various methods, including loss reserves, or investments through entities like a government backed “green bank” program.

In our next article in this series, we will discuss issues with standardizing agreements.

 

 

 

Topics: Structured Transactions & Tax, Power Generation, Energy Finance, Distributed Energy, Solar Energy, Renewable Energy

Sullivan

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