Deutsche Bank AG (DBK) sold the first securities backed by bonds tied to U.S. energy-saving projects in a deal that follows a federal agency’s objections to the underlying homeowner borrowing.
The Western Riverside Council of Governments in California issued the underlying notes, according to a presale report by Kroll Bond Rating Agency, which planned to grant AA grades to the securities sold today. The offering totaled $103.8 million and carried a 4.75 percent coupon, according to a person with knowledge of the sale, who asked not to be named because the information wasn’t public.
The debt is backed by liens on homes created as consumers are given funds for work such as weather sealing, insulation upgrades or solar-panel installations, called Property Assessed Clean Energy assessments. The notes might incur losses if the overseer of government-backed mortgage guarantors Fannie Mae and Freddie Mac decides to challenge the priority status of the liens in federal court, Kroll said.
The credit grader “views this risk as remote,” analysts Brian Ford, Lenny Giltman, Anthony Nocera and Andrew Giudici wrote in the Feb. 27 report.
Pace programs, which cover the initial costs of the improvements, started in 2008, while legislation enabling their use was passed in 31 states by 2013, according to PACENow, a Pleasantville, New York-based advocacy group.
With the liens that are similar to tax assessments said to rank more senior than mortgages, giving them a greater right to foreclosure proceeds, the Federal Housing Finance Agency told Fannie Mae (FNMA) and Freddie Mac in 2010 to avoid guaranteeing new loans on properties with them. Last year, after facing opposition from California’s attorney general, the FHFA defeated a court challenge to the directive.
Investor protections in today’s securitization include more assessments serving as collateral than the amount of notes sold, a reserve fund and interest rates on the underlying bonds that exceed those of the securities by almost 3 percentage points, according to Kroll’s report.
Renovate America Inc. Chief Financial Officer Thomas Hemmings said last week that the Western Riverside Council would decline to comment until the deal settled. Renovate America provides Pace services to the council. Denise Dunckel, an FHFA spokeswoman, declined to comment this week and Oksana Poltavets, a spokeswoman for Deutsche Bank, said today that she couldn’t immediately comment.
Pace financing can also be used for commercial properties. Simon Property Group Inc. (SPG), the largest U.S. shopping-mall owner, and Prologis Inc. the world’s biggest warehouse owner, have been among borrowers under the programs, which can also be funded by municipalities’ direct sales of bonds to investors, Bloomberg News reported last year.