Renewable Funding, emboldened by the success of its first three trips to the securitization market, is preparing to finance an even larger portion of its lending for energy efficiency upgrades.

It's an indication that investors are becoming more comfortable with the risk of Property Assessed Clean Energy Bonds, which ultimately are backed by assessments on homeowners' tax bills and can complicate efforts to sell or refinance mortgages.

In Renewable Funding's first three transactions, it issued a single tranche of triple-A rated securities. The new transaction, dubbed Golden Bear 2016-R, will issue a $51 million tranche of fixed-rate notes with a preliminary BBB rating from Kroll Bond Rating Agency. It is backed by the residual interest in three previous PACE securitizations: Golden Bear 2015-1, Golden Bear 2016-1 and Golden Bear 2016-2.

The residual interests of these three deals are entitled to whatever funds are left over after the senior notes are repaid and any extraordinary expenses are paid. The primary risk, according to Kroll, is that extraordinary expenses such as litigation or the costs associated with foreclosure will divert cash from the residual interest. The ratings agency thinks that this risk is mitigated by the fact that there are three separate transactions backing the new notes.

Another risk: Rising prepayment rates on the underlying PACE financing could eat into the flow of funds to the residual interest. Normally, the tax assessments used to repay PACE financing is not prepaid when a home is sold. Rather, the new homeowner assumes the lien. However, it may be necessary to prepay PACE financing in a foreclosure or if a prospective buyer is unable to obtain financing for the home without prepaying the PACE lien. Homeowners can also voluntarily prepay.

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