Presenting a live 90-minute webinar with interactive Q&A Solar Securitization: Leveraging Alternative Financing Without Jeopardizing Existing Investor Tax Breaks TUESDAY, MAY 2, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Gary P . Blitz, Esq., Senior Managing Director, Aon Transaction Solutions , New York Andrew C. Coronios, Partner, Chadbourne & Parke , New York Matthew Brand, Director, Credit Suisse Securities , New York 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. 10 .
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Solar Securitizations: Leveraging Alternative Financing Without Jeopardizing Existing Investor Tax Breaks Andrew Coronios, Partner, Chadbourne & Parke LLP Matthew Brand, Director, Credit Suisse Securities Gary Blitz, Senior Managing Director, AON Transaction Solutions
Agenda • Solar Financing Landscape • Role of Securitization • Basics of a Securitization • Key Requirements • Securitizations without Tax Equity • Securitizations with Tax Equity • Asset and structure risks • Tax Insurance • Future of Solar Securitizations 6
Solar Financing Landscape • Distributed solar (both residential and commercial & industrial) was largely deployed in the US with a third party ownership model • No money down 20 year contracts with homeowner (lease or PPA) • Developer retains ownership of the PV systems and related tax benefits (30% ITC and accelerated/bonus depreciation) o ITC was extended in late 2015 2016 – 2019, the ITC remains at 30% o o 2020, the ITC steps down to 26% o 2021, the ITC steps down to 22% o 2022 and later, the residential credit drops to zero and the commercial and utility credit steps down to a permanent 10%. • Developer typically retained O&M responsibility for life of contract • Monetizing tax benefits requires tax equity structures • Partnership flip • Lease pass-through or inverted lease • Sale-leaseback 7
Solar Financing Landscape (Cont’d) • In residential distributed solar, systems are increasingly financed through solar loans • Homeowner/borrower uses tax credits – often with option to prepay loan with tax savings • Homeowner responsible for O&M although some installers offer extended warranties or service contracts (directly or through third-parties) • Estimates vary but market participants have estimated loans to account for 30%-50%+ of the residential solar market 8
Solar Financing Landscape (Cont’d) • Optimal capital structures in solar financings often involve non-recourse financing at entity above the tax equity (i.e.,back-leverage) • Back-leverage does not subordinate tax equity • Does not risk ITC recapture; o Transfers o Entity Foreclosure • Avoids complex inter-creditor terms and attracts more tax equity sources; • Back-leverage is non-recourse debt secured by the developer’s cash equity position in a solar system; • More expensive than project level debt • Shorter tenors (7-10 years) • Still involves negotiation with Tax equity provider 9
The Securitization Markets • Securitization is a technique to pool assets (usually financial receivables) into a special purpose vehicle which then issues securities to investors • Auto loans • Credit card receivables • Home mortgage loans • A securitization vehicle has a number of advantages: • Cheaper cost of capital • Risk diversification to investors • Public rating increases pool of investors • Tends to work best with assets that have/are: • Predictable cash flows • Long and Successful track record • Easy to administer • Highly fungible 10
How it works: basic securitization structure Contracts creating assets be (e.g., leases, loans) Obligors Originator Excess True sale Obligor Cash of assets Servicing Issue Payments Flow Agreement $$ $$ $$ Delivery of Custodian Contracts Issuer Issuer (SPE) Back-up Lockbox Back-up Servicing Servicer Excess Agreement Issue Cash Pledge of Cash Flow $$ Notes all assets Sweep $$ Notes $$ Indenture ABS Investors Issue $$ Trustee P+I Payments 11
Solar Securitizations • Securitizations in solar are primarily aimed at leveraging cash flows from cash equity or customer loans • Focused on the residential solar market • Fungible assets • Standardized documents • Financing easily fits consumer receivables; • Solar C&I segment continues to explore use of this financing vehicle • Can be viewed as a alternative to term back-leverage debt 12
Solar Securitizations to Date • 10 solar securitizations have been executed into the ABS capital markets • All transactions have been comprised of all or mostly residential solar assets • Nearly $1.1bn raised • Close to 660MW • Some transactions have incorporated multi-tranche structures, including up to 3 classes of notes offered • Advance Rates to the senior investment grade tranche ranging from mid ~60 ’s to high ~70 ’s • Blended yields to the senior investment grade tranche of mid/high 4 ’s, depending upon the tenor • Minimum Fico Scores in underlying contracts well over 700 • Maturity less than 10 years across recent deals. 13
Securitizations to Date Issue Coupon WAL Rating Pricing Structure % Date Resi SolarCity LMC I 4.80% ~7.0yr S&P: BBB+ 11/13/13 Directly owned 71% $54,425,000 (Lease/PPA) SolarCity LMC II 4.59% ~6.6yr S&P: BBB+ 04/02/14 Directly owned 87% $70,200,000 (Lease/PPA) SolarCity LMC III 4.02% (A) ~7.0yr S&P: BBB+ / BB 07/24/14 Inverted lease 86% $201,500,000 5.44% (B) (Lease/PPA) Sunrun Callisto 4.40% (A) ~7.0yr (A) KBRA: A / BBB 06/30/15 Inverted lease 100% $111,000,000 5.38% (B) ~7.5yr (B) (Lease/PPA) SolarCity LMC IV 4.18% (A) ~6yr (A) KBRA: A / BBB 08/07/15 Partnership flip 100% $123,500,000 5.58% (B) ~6.5yr (B) (Lease/PPA) 4.80% (A) SolarCity FTE 1 ~5.8yr (A) S&P: BBB / NR 01/13/16 Directly owned 100% 6.85% (B) $185,000,000 ~6.0yr (B) KBRA: A / BBB- (Solar Loan) 5.25% (A) SolarCity LMC V ~6.0yr (A) S&P: BBB / BB 02/24/16 Inverted lease & 100% Retained (B) $57,450,000 ~6.6yr (B) KBRA: BBB+ / directly owned BB+ (Lease/PPA) 14
Securitizations to Date Issue Coupon WAL Rating Pricing Structure % Date Resi 4.97% (A) 01/20/17 SolarCity FTE 2 ~5.4yr (A) KBRA: A- / BBB / Directly owned 100% 6.09% (B) $145,000,000 ~5.6yr (B) BB+ (Solar Loan) 7.50% (C) ~4.2yr (C) Mosaic Solar 4.45% ~4.1yr KBRA: A 02/02/17 Directly owned 100% 2017-1 (Solar Loan) $138,950,000 Sunnova 2017-1 4.94% (A) ~6.0yr (A) KBRA: A / BBB / 04/11/17 Directly owned 100% $254,750,000 6.00% (B) ~6.0yr (B) NR (Lease/PPA) 8.00% (C) ~3.8yr (C) 15
Solar Securitization Basics 16
Key Requirements • Consistency of assets o Similarities in credit quality, term, documentation • Critical mass of assets o Securitization require sufficient pool size to justify transaction costs o Overcollateralization o Repeatable and scalable • Structure Requirements o See prior slide regarding SPE status and security/control over cash flow • Servicing and O&M Requirements • Inspecting Engineer’s Report • Reporting o Servicer reports covering not only financial performance of the assets, but also defaults, restructurings, casualty, inverter replacement, other repairs, panel performance etc. 17
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