Borrowing money

IRA’s broad reach should accelerate ABS on multiple fronts

The Inflation Reduction Act (IRA), which had a historic beginning as President Joseph Biden’s social policy legislation, will get a new life that will have a significant impact on energy-related markets, in particular solar, and the asset-backed securities (ABS) that finance them.

To date, most renewable energy-related ABS deals have bundled loans funding the installation and maintenance of consumer solar panels, and this is where the IRA’s first impact on the ABS market will almost be. definitely feel. Since the first solar ABS transactions emerged in 2013, said Elana Lipchak, who leads Bank of America Securities’ ESG research for U.S. securitized products, there have been more than $17 billion in cumulative issuances. ‘Solar ABS. The agreements securitize loans as well as leases and power purchase agreements (PPAs) that support consumer solar installations.

Issuance of solar ABS hit a record high last year of 14 deals totaling nearly $4 billion, and sponsors had nearly reached that level by early September this year.

Existing federal investment tax credits (ITCs) were set to expire in two years, but market growth for solar panels and related ABS is expected to continue regardless, Lipchak said, as demand for olar power has recently been prompted by skyrocketing fuel costs.

The IRA raises the ITC to 30% from the current 26% and extends it to 2034, increasing incentives to adopt solar power and providing greater market certainty, Lipchak said. However, this support is unlikely to fuel an immediate increase in solar ABS deals, given ongoing supply chain issues. The IRA also provides incentives to increase domestic production of renewable energy equipment, reducing future snafus, Lipchak said, but that will take years to unfold.

Still, the increase in the IRA’s ITC makes solar systems more affordable for consumers and should lead to better ABS, said Maxim Berger, head of ratings agency Kroll Bond which focuses on energy. Consumer ABS. In addition, he said, the ITC has been expanded to include batteries, so it can now be used to repay loans or parts of loans used, for example, to add a battery to a existing solar photovoltaic system or as a stand-alone system. purchase.

In fact, the IRA’s tax incentives should accelerate the trend for consumers to include batteries in their solar system purchases, said Nathan Gabig, a KPMG partner specializing in renewable energy finance, adding that a client of KPMG now includes batteries in approximately 25% of systems. it sells. The inclusion of batteries that reduce consumers’ reliance on utility power grids should encourage them to continue to repay their loans.

Gabig noted the first-ever solar ABS commercial deal completed in May, a $402 million private deal backed by 376 solar sites by Luminace, a subsidiary of Brookfield Renewable. He added that the IRA’s tax incentives should accelerate the issuance of more trade deals.

The IRA is also expected to accelerate the issuance of the first ABS deals backed by “virtual power plants”, in which companies such as Swell Energy and Soltage establish battery fleets in metropolitan areas to store the solar power they sell. then to utilities and businesses during off-peak hours. during peak hours or in the event of a breakdown. Such deals are currently under discussion, Gabig said, and are awaiting comments from rating agencies.

“The principle is that there is no waste of green electrons,” he said, noting that revenue streams from highly rated utilities and corporate clients should make such transactions attractive to investors. investors who demand ever greater exposure to credits that meet environmental, social and governance (ESG) criteria. guidelines.

Another ABS market the IRA is likely to bolster will be the securitization of Commercial Property Assessed Clean Energy (C-PACE) loans, which commercial property owners use to finance clean energy upgrades ranging from lighting systems and high efficiency heating, heat recovery and steam. pitfalls, to renewable energy systems. C-PACE loans are facilitated by state-level public-private partnerships that include state green banks, to which the IRA is allocating $27 billion. Borrowers repay principal over time through voluntary property tax assessments, allowing for longer-term financing and the transferability of repayment obligations to the next owner.

“We see a huge need in the commercial real estate sector for financing to retrofit commercial buildings,” said Alexandra Cooley, co-founder and chief investment officer of Nuveen Green Capital. She noted recent research by Jones Lang Lasalle showing a 6% rent premium and 7.6% sales premium for buildings with green certification.
Formerly GreenWorks Lending until acquired by Nuveen Asset Management in 2021 and rebranded in January 2022, the company issued the first-ever C-PACE-backed private ABS deal in 2017 and two more private deals since then. Last December, it completed the largest Rule 144A transaction to date, backed by those assets. Truist Securities and Guggenheim Securities acted as joint bookrunners.

Cooley said a barrier to clean energy adoption has been the large upfront capital outlay that results in relatively low operational savings over time. Tools such as the ITC and other tax credits, bolstered by the IRA, reduce these expenses from the outset, she said. When borrowers combine these credits with the benefits of C-PACE, they can realize significant operational savings.

“If you reduce the upfront expense, the bottom line impact starts to be much more attractive to businesses and building owners, especially when combined with financing,” Cooley said.

In addition, the new law dramatically increases the types of technologies eligible for tax credits, broadening the energy impact of projects that building owners find financially attractive.

“The IRA is transformative because it expands eligible technologies and also makes those technologies much more affordable through a variety of measures,” Cooley said. She added that new C-PACE loans — more than $2 billion planned this year — can help make projects cash flow positive from the start and energy costs more predictable, making future ABS deals easier and particularly those issued in quasi-public Rule 144A. market.

Securitization of EV assets still has low mileage

So much of the talk around energy-related ABS markets naturally turns to securitizations involving electric vehicles. To date, only Tesla has issued ABS agreements backed by electric vehicles (EVs). However, IRA incentives to buy electric vehicles could accelerate the arrival of such transactions from other issuers, Berger said, initially in the markets for new and prime automotive ABS, given the purchase price. means of electric vehicles. And more generally, he added, the IRA and the billions of dollars it pumps into the economy to cut consumer energy and healthcare costs will serve to bolster the wider market for ABS.

“By reducing these costs, it will free up consumers’ wallets to pay other debts,” Berger said. He added, “in the medium to long term, as the IRA really starts to ramp up, it could reduce delinquencies and defaults in other consumer ABS markets.”