Solar and EV ABS securitisations: coming soon or a long way off?
These two potential new types of securitisation transactions are the talk of the town, but how real are the prospects of such deals in the near future? We spoke to Doug Paterson, director EMEA Structured Finance at S&P Global Ratings and looked into the future of Electric Vehicle and Solar asset-back securitisations.
What innovations do you see in the securitisation market?
Governments are increasingly incentivizing investment in more sustainable infrastructure. Tax incentives which give borrowers an incentive to invest in solar panels is one such example. We believe that market developments like these will spur the volume of solar securitisation originations. While we are not there yet, I believe we are likely to see a solar securitisation either this year or next.
Are there specific factors putting the brakes on solar securitisations?
One of the catalysts in terms of public solar securitisation deals is a basic need for a critical mass of originations. Pure volume. So, any legislation which incentivize a greater volume of originations will be beneficial for the securitization market in general. The higher the volume of solar originations, the more data and the greater the potential for securitisation transactions going forward.
How does the European market compare to the US market on this?
The US benefits greatly from the Inflation Reduction Act, that one piece of legislation makes for a consolidated fiscal incentive for numerous initiatives which ultimate could finance more solar securitisation issuance. For example, the legislation extended the principal 30% tax credit for investments in residential solar energy, with the step-down beginning in 2032.The picture in Europe is rather more fragmented and individual countries are implementing different benefits, including partially subsidizing the installation of solar panels as well as tax benefits. Having said that, we have observed positive developments which indicate that these incentives may well boost solar loan volumes and ultimately securitisations in Europe.
What are the challenges which the market has with potential solar securitisation issuance?
One main challenges for potential public solar securitisations is that solar loan contracts have very long terms. They often have loan terms of over 20 years, for example. And as they are relatively new products, there is not much data available. Accessing performance data is a challenge as, by definition, you generally only have two or three years’ worth of historical data. However, based on the discussions we have been having the marketplace, we nevertheless believe that the first solar securitisations could be issued quite soon.
How do you see the solar securitisation market potentially evolving? What are the factors which could stimulate more deals?
First it comes down to data. Loan performance data is limited, particularly for the long terms of these solar contracts. Additionally compared to the U.S., where credit scores are widely available through FICO, European credit scores are more fragmented, and countries rely on their national credit agencies such as Schufa in Germany or Equifax in the U.K. Other European credit agencies would only record prior credit failures such as in Spain and many lenders may need to develop their own underwriting process.
One final challenge is simply volume: one needs a critical mass of loan volume to launch a securitisation. Having said all that, we believe volumes are set to pick up considerably!
What credit ratings does S&P envisage for solar securitisations?
We may cap ratings in this asset class to address specific risks, such as country risks, in a transaction. However, to the extent that any of these risks are less likely to affect the performance of a specific solar asset portfolio, we may be able to assign a higher credit rating. In those cases, we may adjust assumptions appropriate for the related stress scenarios. For solar loan transactions we would generally apply an ‘A’ category cap to these transactions to the extent that any of the risks previously discussed affect the performance.
Are investors keen?
During the informal discussions that we’ve had with investors, they seem happy to potentially participate in these deals. Their prime concerns are about the limitations in terms of performance data. Once these deals take place we will likely see keen interest. Currently the performance data discussion is something of a chicken and egg situation.
How do you view Electric Vehicle (EV) securitisations?
From our point of view this is easier to address than Solar ABS, from a rating perspective. Some 20% of all new car registrations are of EVs in many European countries, and most current auto ABS deals include a proportion of EVs. Most of today’s transactions are a combination of internal combustion engine (ICE) vehicles and EV loans.
That’s a good thing, right?
Certainly, however, the prospect of full EV ABS presents certain dilemmas in terms of ratings.
A good example is the fact that if we see an auto ABS contains more than a 10% proportion of EVs, we apply a credit penalty to the excess concentration above 10%.
Yes, the penalty is based on the recoveries of residual value.
Please explain: the general perception is that EVs are beneficial, surely?
At this point we have to differentiate between the environmental and emissions impact of an EV and looking at these vehicles from a credit perspective. We looked specifically at the depreciation factor of ICE vehicles compared to EVs and observed a material credit differential of up to approximately 10% between ICE vehicles and EVs, for secondary market values i.e., cars which are three years old with 60,000 kms on the clock. Basically, EVs materially underperform from a credit perspective. We believe therefore that electric vehicles have a higher level of credit risk due to their lower performance on the secondary market.
But isn’t there talk of potential green bonds made up of only EV loans?
There are some challenges to these deals for originators that finance both ICE and EVs. The reason is two-fold: if originators launch ABS transactions with 100% EV they may gain a green label for that securitisation. However, there could be a concern about a negative knock-on effect for 100% ICE transactions i.e., that such deals could generate negative headlines because they are perceived as not being environmentally friendly. We have spoken to a number of originators on this topic, and the majority say they will likely continue to originate a combination of ICE and EV and securitise them together.
This means little chance of a pure EV auto ABS, then?
The only exception might be from an exclusively EV manufacturer. However currently we see a higher level of credit risk for EVs, and that perspective is shared by most of the investors we speak to. Perhaps in future the market will shift, and we’ll reach an inflection point where EV secondary values perform better than ICE. However, we do not see the mass market adopting EVs as fast as some might have expected a couple of years ago.
Why might that be?
A number of factors are likely involved: concerns about technical obsolescence, price wars for EVs and people are also wary of buying them because of the unpredictable resale value.
What do you hope to personally gain from the Securitisation Event?
I’m keen to hear how investors’ views on different asset types in today’s market and provide transparency about how we apply our criteria and derive our ratings. Engaging with fellow market participants face to face in Amsterdam is always energising.
At the Securitisation Event Doug Paterson, director EMEA Structured Finance at S&P Global Ratings will participate in the panel about ‘ESG Regulatory Panel Discussion: Empowering the EU Green Deal: Securitisation’s Sustainable Funding Role’.
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