(Bloomberg) -- European investors accustomed to buying repackaged mortgages and car loans are getting another type of asset-backed security to invest in: bonds backed by solar panel loans.
Perfecta Energia and HomeTree Marketplace Ltd. are both planning to sell repackaged solar panel loans in the public debt market, according to executives at the companies. They would follow a successful deal by Enpal GmbH, which recently became the first company to sell a solar panel-backed security in Europe’s broadly-syndicated market. The German renewables firm also plans more issuance in future.
The deals are set to open up a new frontier for asset-backed debt in Europe, where securitization has been used for years to sell mortgages, car and consumer loans to investors. Such deals package up loans into a new instrument and sell them via a special purpose vehicle, taking risk off the company’s balance sheet. They’re also seen as a way to drive adoption of solar panels by lowering upfront costs for consumers.
“The Enpal deal is good news for everybody,” said Borja Saez, co-founder and chief executive officer of Madrid-based Perfecta Energia. “The pricing seems very attractive and well designed. There will be more deals coming down the road for sure.”
Saez said that his firm is planning a deal in the next 18 months, once it has sold enough solar panels to provide the collateral for a deal size of at least €150 million ($161 million). Hometree is also exploring doing a deal, probably in 2026, according to founder and chief executive officer Simon Phelan. “There is clearly a wall of appetite for such instruments, both in the public and private markets,” he said.
Strong demand for the Enpal deal is a good sign for other potential borrowers. At one stage, one of the tranches on the deal — the third-highest B tranche — was more than 9 times covered by orders, allowing the company to tighten its pricing, according to a person familiar with the transaction who asked not to be named. The other tranches had enough demand to cover them several times over, the person said.
Enpal also plans to be a repeat issuer. “When you look at the automotive industry and their captive financing units — they are heavy users of ABS to get very attractive funding costs,” said Béla Schramm, securitization director at Enpal, referring to car companies’ in-house customer financing businesses. “Over time we would like to be in a similar place,” he said.
While demand for Enpal’s deal was strong, the nascent nature of the asset class means that risks are hard to measure, leaving some questions around this type of debt. Ultimately, the technology that these ABS is based on is still in its infancy, and there are issues with both the lack of sun and power storage facilities in Europe.
Douglas Charleston, who heads ABS at TwentyFour Asset Management, a London-based money manager, acknowledged that the asset class remains untested at this early stage. Still, “the German consumers taking these loans are indeed very much in the prime category and so even if the equipment falls apart, the loans are secured and they will repay in any event,” he said, referring to Enpal’s deal.
Assessing Risks
Ratings agencies have also been weighing the risks, with Moody’s Ratings provisionally giving the various tranches of the Enpal deal ratings of between Aaa and B2. That’s somewhere between where it would rate a typical mortgage-backed security and a consumer loan-backed security on the lower-rated tranches, according to Moody’s credit analyst Armin Krapf.
“Given that the loans are from home owners, the quality is better than unsecured consumer loans,” he said. On the other hand, the securities are riskier than auto loan-backed instruments because the underlying loans have maturities of around 20 years compared to around three years for a typical car financing, he added.
Investors assessing the new asset class may also look to the US, where solar-panel backed deals by renewables companies have been growing for some time.
Still, the market for solar ABS in the US is currently going through a somewhat turbulent time, with SunPower Corp., one of the country’s top five residential solar installers, filing for bankruptcy earlier this year and raising concerns about the industry at large. Victory for Donald Trump in the US presidential election also means that the US will likely prioritize fossil fuels over renewables in coming years, potentially hurting demand for solar panels.
But European incumbents are hoping that investors take into account differentiating factors between the two regions.
“The US is a more aggressive market where multiple players are competing and doing things like inflating the price of the renewable systems in exchange for a discount to the interest rate on the loan,” said Hometree’s Phelan. “We don’t think that Europe will make that mistake, and it would also be harder to do in the higher interest rate environment we have today.”
--With assistance from Scott Carpenter and Charles Williams.
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