07/29/2011

Clean-Energy Program Sparks Issuing Interest

Look for municipalities to begin issuing a new type of securitization backed by loans on clean-energy equipment.

The deals would stem from the Property Assessed Clean Energy program, an initiative in which local-government entities lend money to owners of residential and commercial properties for the installation of improved insulation, solar panels and other energy-saving items.

Since the program formally launched in 2008, so-called Pace loans typically have been funded via municipal-bond issues. But word has begun circulating that some of the participating municipalities want to start selling paper underpinned directly by their credits — deals that would be structured as taxable asset-backed securities. The first such issue could come as early as October.

In a Pace loan, the borrower agrees to repay his or her debt through a special property-tax assessment that remains in place for 10-20 years. In that way, securitizations of the credits would differ from a planned spurt of bond issues from private-sector players including NRG Energy, SunRun and SolarCity that lease solar-power equipment to homeowners.

Those transactions had been slated to make the rounds with investors this year, but have been delayed until 2012 because no rating agencies have methods in place yet to grade the obligations. That includes DBRS, which has placed any reviews of solar-panel lease paper on the back burner so that it can focus on being the first to come out with criteria for Pace issues.

DBRS’ heightened emphasis on Pace appears to be geared toward winning an assignment from an unidentified municipality in California that’s planning an offering. The agency’s methodology is set for release in the near future. “DBRS feels that Pace is an area that shows strong potential. They will eventually get in on rating solar deals, but that is secondary to Pace,” one source said.

Large underwriters including Barclays and UBS also have been looking into the program.

Pace is a voluntary program in which states pass legislation approving participation by municipalities under their jurisdictions — a step 27 states have taken so far. California was among the earliest and most active players in the initiative, producing more than $50 million of the loans to date. Municipal-bond issuers there have included Sonoma County.

The Obama Administration’s American Recovery and Reinvestment Act also included $150 million of financing that local-government entities could tap instead of issuing tax-exempt paper. But Pace has been the subject of considerable skepticism, largely because the tax assessments involved in the effort have the potential to create risk-management headaches for mortgage lenders. Indeed, heeding a warning from their regulator, the Federal Housing Finance Agency, Fannie Mae and Freddie Mac began rejecting mortgages on homes with Pace assessments in 2010.

That move essentially halted the spread of the program. However, Reps. Nan Hayworth (R-N.Y.), Dan Lungren (R-Calif.) and Mike Thompson (D-Calif.) introduced a bill called the Pace Protection Act on July 21 that would force Fannie and Freddie to underwrite loans with Pace assessments.

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