Solar ABS looks to resume growth after withstanding rates storm

At first glance, residential solar panel financier Sunrun’s $230m ABS issuance in April was nothing unusual. Like most deals in the now decade-old sector, it boasted a single-A rating from KBRA, and its size was in line with most other solar ABS trades priced this year.

But Sunrun Neptune Issuer 2024-1 caught the eye. At 195bp, it had the lowest spread for a similarly rated transaction in the sector since 2021 — before the blow-out in US interest rates. Danny Abajian, Sunrun’s CFO, went as far as publicly highlighting the 37.5bp improvement versus a private deal that the firm had signed in February, and that it was 45bp inside where the issuer had tapped the market in September 2023.

A new solar ABS landing inside 200bp was a milestone, market sources agree.

“People are really focused on that level and the ability to prove the refi story on seasoned assets, or assets that have been through one financing cycle,” says one source not involved in the deal.

Although solar ABS has continued to tick along, growth in public issuance plateaued at $4.3bn in 2023, according to Finsight, after 10 years of impressive growth. With seven issuers bringing $1.7bn of public issuance as of May 22, it will require a pick-up in activity or deal size for 2024 to match that figure.

There are other reasons why the market is eager to show its mettle. Several of the companies behind the deals have come under scrutiny amid questions of how their business models can withstand the rates volatility.

“With the rates movement of the past couple of years some of the issuers have found themselves in a bind, and a prolonged period of instability with originators and servicers wouldn’t be good for the market,” says Nicholas Rogers, head of non-traditional ABS origination at RBC.

Many point out the divergence between struggling corporate stories and the performance of the collateral. Although KBRA’s latest US solar loan ABS index from April showed that late-stage delinquencies in solar loan pools had reached the highest levels of any April on record, the rating agency still expects solar loan credit performance to outperform other consumer loan products in the near term, given the utility cost savings and superior borrower credit profiles.

One esoteric ABS trader tells GlobalCapital that, although he thinks losses are proving higher than the levels anticipated when deals were priced, and that some junior tranches are indicating expectations of distress, he still has confidence in senior bonds across solar ABS.

“In most cases it’s not about the quality of the receivables but about the profitability of the receivables,” says Rogers.

Still, with the likes of Sunnova and Sunrun continuing to post net losses and seeing revenues fall short in the first quarter of 2024, the financial sustainability of several of the sponsors of solar ABS transactions is still unproven.

“An important thing [for the solar ABS market] in the near term is demonstrating that these corporates can make money,” says one senior market source. “The big developers of large-scale utility projects are working through the same thing.”

The source argues that “no one is immune from this across the long-dated infrastructure landscape”, noting that even NextEra Energy, one of the largest capital infrastructure investors in the US, has had a “moment in the sun” regarding its liquidity and access to capital in certain parts of its business.

Others feel, therefore, that two other springtime new issues in the solar ABS market were very important. On March 20, EverBright — a subsidiary of NextEra — brought a $288m solar ABS transaction led by RBC. Then on April 10, EnFin, the financing subsidiary of Qcells, one of the world’s largest solar panel producers, made its market debut with a $242m trade.

Where the fintech-type businesses such as SolarCity, Solar Mosaic and Sunnova had done the groundwork in building the asset class, so larger, better-capitalized companies have begun to emerge, with some arguing that Brookfield Asset Management’s $402m May 2022 was the first example.

“We’ve seen a change in terms of the winners and losers [and] who’s been able to really take advantage of the space,” says Rogers at RBC. “[The market is] going from a kind of fintech-led development early on to some pretty significant size issuers with differentiated strategies that are probably more holistically connected than a fintech that’s found an opportunity for arbitrage or efficiency.”

Rogers adds: “In the context of more challenging times ahead for some originators in the space, it’s important for installers to be able to feel comfortable with their counterparties, and having real equity and reliability behind the originators will ultimately be what helps to insulate this market over time from this. Without that it could be hard to see much further growth.”

He says a couple of other new entrants are looking to access ABS, possibly as soon as this year.

“We’ve really seen a lot of good growth, both on the lease PPA side, as well as on the loan side,” he says.

Indeed, although issuance data may suggest a stagnation in the growth of solar ABS, this does not tell the full story. For a start, the data typically only show public deals.

“Much of this is bilateral,” says the industry source. “There’s a lot of behind the scenes, under the radar stuff. A lot of that started after the rates reset in 2022, when people took longer to come into the market or used private or bilateral deals to absorb supply.

“In the private market investors can do more in one clip, and that’s taking a lot of volume.”

Pricing in the private market has proven to be at least as attractive as public markets, say sources, with Sunrun’s private transaction earlier in the year pricing competitively to where 144A deals were being printed, for example.

Some of this shift may be permanent.

“The pick-up in private issuance is in part due to the volatility, but it also says something about the investor base,” says Rogers. “There’s been an expansion of private capital buckets leaking into sectors, like solar ABS, that are not just project finance.

“These funds are buying deals that would have otherwise gone to the 144A broadly distributed market. A lot of investors who we speak to have significant appetite on the fully private side of their houses. In that sense I think it’s something of a shift.”

Yet as fixed income markets more broadly continue their rehabilitation from the rates volatility, with esoteric sectors such as solar usually lagging, bankers are hoping for further tightening in the public market as a way to lure back issuers.

“The next big thing is getting anything [in the new issue market] back to a double digit spread,” says the industry source. “[If we see] single-As at a low one handle spread, or double or triple-As in the double digits, that’s when you can say we’re back.”

If the financing conditions continue to improve and the corporate story can get back on track, there is plenty of reason to believe fundamentally in further growth.

“I do think the US market can become multiples bigger; we are on the right side of all the tailwinds,” says the source. “It’s quite surprising how little we’ve grown while utility rates and access to tax credits have grown materially.

“Now companies can be laser focused on pricing systems correctly, working with homeowners and commercial clients, and there’s also a chance for a huge power price growth. We haven’t had a bull power thesis for a long time, but now with AI and data centers, [there is a] need for power, and people are investing in power.”