A Primer of Collateral-Related Risks
Associated with Solar ABS

Abstract

The U.S. solar industry has experienced tremendous growth in recent years. In 2010, the industry had built solar capacity equivalent to less than one nuclear power plant, but just three years later, in 2013, the industry has built capacity equivalent to three new nuclear power plants. Such an immense build-out of new infrastructure has triggered a corresponding need for greater volumes of cheaper capital. One solution, asset-backed securitization, has long been utilized to finance assets as diverse as aircraft leases, student loans, and mortgages. With the successful issuance of the solar industry’s first rated asset-backed notes (SolarCity LMC Series I) in November 2013, asset-backed securitization appears to have a promising future in financing the solar market. Analyzing this new asset class, however, poses new challenges to underwriters and investors. Traditional methods of borrower-related credit analysis are insufficient for truly understanding solar ABS cash-flow characteristics, which are inextricably tied to the energy generation of the underlying photovoltaic (PV) system asset. In a power purchase agreement (PPA), each kilowatt-hour (kWh) produced by the PV system results in cash generated for the trust. In a lease or loan, each kWh generated results in financial savings for the homeowner, which is a key motivator in the customer’s ongoing willingness to pay a monthly solar bill. Careful diligence of the risk inherent in each portfolio is especially important in the solar asset class because the value of PV panels re-possessed from an installed system is widely understood to be minimal.