Renovate America is marketing a $320.2 million securitization of Property Assessed Clean Energy bonds, its third of the year and eighth overall.
The deal, dubbed HERO Funding 2016-3, will issue two tranches of class A notes with provisional double-A structured finance ratings from both Kroll Bond Rating Agency and DBRS. Both tranches benefit from credit enhancement including 3% overcollateralization and a reserve account equal to eight months of interest that will be funded at closing.
There is also a certificate representing the residual interest in the deal, which will be resecuritized in a separate transaction.
PACE is a means of financing energy-efficient upgrades or renewable energy installations for buildings. In this case, three separate local government entities in California, the Western Riverside Council of Governments, San Bernardino Associated Governments and Los Angeles County, lend money to homeowners and are repaid via an annual assessment on the owner's property tax bill. These assessments are used as collateral for PACE bonds, and the bonds in turn can be securitized, giving the lenders money to put to work making more loans.
In the case of HERO 2016-3, the three entities have contributed $264 million in assessment bonds, and plan to issue $66 million in subsequent bonds through a $75.4 million prefunded account included in the transaction.
The bonds themselves are secured by an initial pool of 12,394 assessments levied against homes in 34 California counties — with Los Angeles County the largest entity with 33.9% of the assessments. Those assessments have an average balance of $21,310, a weighted-average annual interest rate of 7.93% and original terms of 14.45 years.
Many mortgage lenders oppose PACE because it creates a kind of super lien that jumps ahead of a mortgage in terms of payment priority. The Federal Housing Administration recently endorsed PACE, saying it would insure loans on homes with PACE liens, in some cases. However, the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, is staunchly opposed.
Compared with Renovate America’s previous five deals, HERO 2016-3 has a lower average annual payment ($2,916) and a lower weighted average loan-to-value of 6.6%.
Renovate America also plans a companion HERO-2016-3B transaction of $57 billion in Class B notes will be secured by the residual certificate issued in 2016-3 for which payments or distributions will only be issued on an availability basis after the payouts on senior notes. DBRS assigned a provisional BBB rating to the issue.