New entrants Sunnova and Loanpal are key to record residential solar loan ABS issuance

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Issuance of asset-backed securities (ABS) for residential solar loans doubled last year, thanks in large part to the arrival of new market entrants, Loanpal and Sunnova Energy. In their first year as residential solar loan originators in the ABS market, Sunnova and Loanpal’s transactions represented about 46% of the year’s record $1.35 billion in new issuance.

For solar loan originators, last year’s issuance shows that competition and investor demand are increasing, said Melvin Zhou, director at Kroll Bond Rating Agency (KBRA).

The arrival of new market entrants has also increased solar financing companies’ willingness to disburse funds to large installers at an earlier stage during a solar project, and it has accelerated efforts to automate more parts of the application process, he added.

This greater efficiency is important now because investor interest in in residential solar loan ABS is rising, particularly among institutional investors as they incorporate environmental, social and governance (ESG) factors into their investment decision-making processes.

Despite last year’s record issuance, KBRA expects residential solar loan ABS issuance to be flat or only marginally higher in 2020, due partly to the availability of alternative funding sources like retail banks.

Partnerships between banks and residential solar lenders – like Solar Mosaic’s arrangement with SunTrust Bank and Dividend Finance’s partnership with KeyBank – will lower ABS issuance because bank partners will fund a portion of their originations, KBRA said.

Frequent securitizers Solar Mosaic and Dividend Finance issued $468 million and $235 million, respectively, in residential solar loan ABS in 2019. Meanwhile, Loanpal issued two transactions totaling $459 million last year, and Sunnova issued a $168 million transaction.

Residential solar loan originations for the companies that issue KBRA-rated ABS totaled $3.2 billion in 2019, while only $1.5 billion (47%) was sold to 144A or public securitizations. KBRA doesn’t have information about how the remaining $1.7 billion was funded, but possible sources include equity investors, bank partnerships and private placements.

KBRA does not believe that the start of the three-year phaseout of the investment tax credit for residential solar systems will have a meaningful impact on residential solar loan origination this year.