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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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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
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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
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• 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
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• 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
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• 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
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• 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
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• 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)
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