Presenting a live 90-minute webinar with interactive Q&A Solar Securitization: The Emergence of a New Funding Structure Leveraging Alternative Financing Without Jeopardizing Existing Investor Tax Breaks WEDNESDAY, APRIL 13, 2016 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Andrew C. Coronios, Partner, Chadbourne & Parke , New York Eli M. Katz, Partner, Chadbourne & Parke , New York Gary P . Blitz, Esq., Senior Managing Director, Aon Transaction Solutions , New York Stephen J. Viscovich, Managing 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: Emergence of a New Funding Structure Eli Katz, Chadbourne & Parke LLP Andrew Coronios, Chadbourne & Parke LLP Steve Viscovitch, Managing Director, Credit Suisse Securities Gary Blitz, Senior Managing Directing, AON Transaction Solutions CPAM: 9290530
Agenda • Solar Financing Landscape • Role of Securitization • Basics of a Securitization • Securitizations without Tax Equity • Securitizations with Tax Equity • Risk Mitigation • Key Risks • Future of Solar Securitization 6
General Overview 7
Solar Financing Landscape • Solar is largely deployed in the US with a third party ownership model • Tax benefits in solar (30% ITC; accelerated depreciation) require tax equity structures • Partnership flips • Lease Pass-throughs • Sale-leasebacks • In the distributed solar sector, systems are increasingly financed through solar loans • Borrower uses tax credits • No third party ownership model necessary 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., 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 substitute for back-leverage debt 12
Key Deal Terms • 7 solar securitizations have closed so far • All transactions have been comprised of all or mostly residential solar assets • Over $800MM raised • Close to 450Mw • Some transactions have contained both A and B Tranches • Advance Rates ranging from low 60 ’s to high 70 ’s • Blended yields of low 4 ’s to low 6 ’s • Minimum Fico Scores in underlying contracts well over 700 • Maturity less than 10 years across recent deals. 13
Securitizations to Date Issue Interest Rate Tenor Rating Pricing Structure % Date Resi SolarCity LMC I 4.800% 13 Years S&P BBB+ 11/13/13 Directly owned 71% $54,425,000 SolarCity LMC II 4.590% 8 Years S&P BBB+ 04/03/14 Directly owned 87% $70,200,000 ARD SolarCity III 4.026% (A) / 5.45% (B) 8 Years S&P BBB+ /BB 07/25/14 Inverted lease 100% $201,500,000 ARD SunRun 4.400% (A) / 5.38% (B) 9 Years KBRA A/BBB 07/01/15 Inverted lease 100% $111,000,000 ARD SolarCity IV 4.180% (A) / 5.58% (B) 6.5 Years KBRA A/BBB 08/07/15 Partnership flip 100% $123,500,000 ARD AES/MS [TBA]%(A) / 10 Years KBRA BBB/B 30% $100,000,000 [TBA]%(B) [TBA] ARD 4.80% (A) / 6.85% (B) SolarCity FTE 1 6.25 Years S&P BBB+ / NR 01/13/16 Customer loans 100% $185,000,000 ARD KBRA BBB / BB 5.25% (A) / 7.50% (B) SolarCity LMC V 6 Years S&P BBB+ / BB 02/29/16 Inverted lease / 100% $57,450,000 ARD KBRA BBB+ / BB+ directly owned 14
Solar Securitization Basics 15
Key Requirements • Consistency of assets • Similarities in credit quality, term, documentation • Critical mass of assets • Securitization require sufficient pool size to justify transaction costs • Overcollateralization • Repeatable and scalable • Servicing and O&M Requirements • Structure Requirements • See prior slide regarding SPE status and security/control over cash flow • Inspecting Engineer’s Report • Reporting • Servicer reports covering not only financial performance of the assets, but also defaults, restructurings, casualty, inverter replacement, other repairs, panel performance etc. • Company infrastructure • Institutional commitment to build the whole company to support securitization 16
Basic Terms • Minimum FICO ratings for individual residential customers and investment grade or equivalent ratings for non-residential customers originated in compliance with consumer finance regulations • O&M provider to cover production and performance guarantees and equipment replacement • Reserves o Liquidity reserve o Inverter replacement reserve • Debt service coverage ratio o First trigger traps excess cash flow in DSCR reserve Second trigger at lower DSCR causes early amortization event – all excess cash flow o applied to pay down principal 17
Basic Terms cont. • Advance rates from 60 ’s to 70 ’s as % of discounted cash flows • Ratings limitations - because of limited operating history S&P expects ratings to be constrained to low investment-grade for the near future 18
Securitization Without Tax Equity 19
How it works: solar securitization - no tax equity Contracts (20 years) Host Install PV Systems Developer Customers true sale of contracts and Excess Host Management PV Systems Issue Customer Cash Agreement $$ Flow Payments Delivery of $$ $$ Custodian Contracts Issuer Issuer (SPE) Transition Lockbox Manager Manager Transition Excess Agreement Issue Cash Pledge of all Cash Sweep $$ Notes Flow assets $$ $$ Notes Indenture ABS Investors Issue $$ Trustee P+I Payments 20
Securitization With Tax Equity 21
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