IRA’s broad scope should accelerate ABS on multiple fronts

The Inflation Reduction Act (IRA), which had its storied beginning as President Joseph Biden’s social policy law, will be given a new lease of life and will have a major impact on energy-related markets – particularly solar markets – and the asset-backed securities (ABS) that fund them.

Most renewable energy-related ABS deals to date have pooled loans to fund installation and maintenance of consumer solar panels, and that’s where the IRA’s first impact on the ABS market will almost certainly be felt. Since the first solar ABS deals in 2013, said Elana Lipchak, who leads Bank of America Securities’ ESG research for US securitized products, more than $17 billion has been totaled in solar ABS issuance. The deals securitise loans, leases and power purchase agreements (PPAs) that support consumer solar systems.

Solar ABS issuance hit a record last year with 14 deals totaling nearly $4 billion, and sponsors had nearly reached that level by early September this year.

Existing federal investment tax credits (ITC) would expire in two years, but growth in the solar panel market and related ABS is likely to continue, Lipchak said, as demand for solar power was recently fueled by skyrocketing fuel costs.

The IRA will increase the ITC to 30%, compared to the current 26%, and extend it to 2034, increasing incentives for solar adoption and providing more certainty to the market, Lipchak said. However, given the ongoing problems in the supply chain, this support is unlikely to result in an immediate spike in solar ABS deals. The IRA also offers incentives to increase domestic production of renewable energy equipment and reduce future problems, Lipchak said, but that will take years to unfold.

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Still, the IRA’s ITC increase makes solar systems more affordable for consumers and should lead to better ABS, said Maxim Berger, a director at the Kroll Bond Rating Agency that focuses on consumer ABS. In addition, batteries have been added to the ITC, so it can now be used to repay loans or part of loans used, for example, to add a battery to an existing solar photovoltaic system or to buy as a standalone system.

In fact, the IRA tax incentives should accelerate the trend for consumers to include batteries in their solar system purchases, said Nathan Gabig, a partner at KPMG who focuses on renewable energy financing, adding that one KPMG client now has batteries in about 25 % of the systems it sells includes. The inclusion of batteries, which reduce consumers’ dependence on utility grids, should increase their incentive to continue making loan payments.

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

The IRA should also accelerate the issuance of the first ABS deals, backed by “virtual power plants,” where companies like Swell Energy and Soltage will build fleets of batteries in metropolitan areas to store solar energy, which they will then sell to utilities and corporations when they are off. Peak times or failures. Such deals are currently under discussion, said Gabig, and are waiting for contributions from the rating agencies.

“The premise is that green electrons are not wasted,” he said, noting that the revenue streams from highly rated utility and corporate customers should make such deals attractive to investors demanding ever-greater exposure to environmental-facing loans , Social and Governance (ESG). guidelines.

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Another ABS market that the IRA is likely to bolster is the securitization of Commercial Property Assessed Clean Energy (C-PACE) loans, which commercial building owners use to fund clean energy upgrades ranging from high-efficiency lighting and heating systems to heat recovery and steam traps to renewable energy systems. C-PACE loans are made possible through state-level public-private partnerships that include state-owned Green Banks, to which the IRA is providing $27 billion. Borrowers repay principal over time through voluntary property tax assessment, allowing for longer-term funding and portability of repayment obligations to the next property owner.

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

Cooley said one barrier to clean energy adoption has been the high upfront capital expenditure, which translated into relatively little operational savings over time. Tools like the ITC and other tax credits — backed by the IRA — reduce those costs upfront, she said. When borrowers combine these loans with the benefits of C-PACE, they can realize significant operational savings.

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“When you reduce the upfront cost, the bottom line impact becomes much more attractive to businesses and building owners, especially when combined with financing,” Cooley said.

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

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

EV asset securitization still has low mileage

Of course, so much of the discussion about energy-related ABS markets revolves around EV securitization. So far, only Tesla has made ABS deals with electric vehicles (EVs). But the IRA’s incentives to buy EVs could hasten the arrival of such deals from other issuers, Berger said, initially in the new and premium auto ABS markets, given the average purchase price of EVs. And more broadly, he added, the IRA and the billions of dollars it brings to the economy to reduce consumers’ energy and healthcare bills will serve to bolster the broader ABS market.

“Reducing those costs will free up consumers’ wallets to pay off other debts,” Berger said. He added: “In the medium to long term, if the IRA really gains momentum, it can reduce arrears and defaults in other consumer ABS markets.”

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