Last December, DSD Renewables announced the closing of $155 million in debt financing for a first-of-its kind commercial and industrial (C&I) solar asset-backed securitization (ABS) with a significant concentration of community solar assets. Solar asset-backed securities represent a growing opportunity to package assets originated by solar developers into diverse portfolios and offer opportunities for investors to deploy capital into renewable energy at scale.

ABS is still somewhat of a new concept in the solar industry, and while there have been successful securitizations of residential and C&I portfolios, no one has been able to securitize community solar assets like this before. Until now. While it took a considerable amount of education and negotiation to explain and appropriately account for the risk of community solar cash flows, the result will serve as a precedent going forward, allowing for greater access to community solar across the board.

The Process

As the owner of the first solar securitization to include a significant portion of community solar projects, DSD worked closely with agencies and investors over the course of six months to help them better understand community solar revenue structures and to adequately assess risk through a data-driven approach.

To start, DSD took two fully operational tax equity portfolios consisting of C&I and distributed generation projects across 11 states (56% of which is onsite solar and 44% is community solar), and with Atlas SP who was the structuring agent on the ABS deal, organized the cash flows into bonds that had principal and interest payments.

”Our aim was to present these bonds in a way that traditional bond investors and those who invest in asset-backed security issuances are used to seeing,” said Ian Manchester, DSD’s VP of Structured Finance, who spearheaded the ABS. “We worked with investors who have experience investing in renewables, particularly in the residential space, which is a bit more mature when it comes to the ABS market. We also spoke with investors who have never deployed capital into the renewables market before to get a better sense of the questions they’d have and any apprehension we would need to address.“

Educating investors about what is still a relatively young industry has always been a big part of DSD’s role in the renewables space. In 2019, DSD was raising tax equity for a portfolio of assets, including (for one of the first times), community solar. At the time, DSD took great efforts to explain how community solar works, where the revenues come from, its associated risks, and how to mitigate those in a way that would make banks comfortable enough to invest.

We worked with investors who have experience investing in renewables, particularly in the residential space, which is a bit more mature when it comes to the ABS market.

In addition to our education process, DSD took a data-driven approach to address and ease community solar-related risk concerns head on.

“One of the most important pieces of the ABS is that it’s a rated transaction,” said Ian. “We gathered five to 10 years worth of operational history from different community solar customer acquisition and management providers (our third party partners who manage DSD’s community solar projects) and worked with the Kroll Bond Rating Agency (KBRA) to evaluate risks correctly and put together assumptions based on the data. KBRA was able to review the creditworthiness of our bonds and determine a rating for them within our portfolio.”

Why this matters for community solar

The goal of community solar has always been to make renewable energy more accessible to more people. However, financing it has remained a hurdle and subscribers (many of whom are residential customers and small businesses) often have to rely on good FICO scores in order to subscribe. While this isn’t allowed in all markets, especially those that serve low-to-moderate income customers (which many programs now do), historically these FICO requirements have hurt the inclusivity of these projects, defeating their entire purpose of increasing access to renewable energy.

“For us at DSD, it’s always felt wrong that it’s been an exclusive entity available only to certain subscribers, with limited accessibility to those who need it most,” shared Sarah Moon, DSD’s Senior Director of Community Solar Origination. “What makes this ABS so monumental is that we were able to prove to the credit rating agency (KBRA) that FICO scores are not the only way to evaluate a subscriber’s credit worthiness or likelihood of paying for their community solar credits. We are beyond proud of the fact we could convince the agency to look at alternative methods of evaluating the performance of these assets that did not rely on individual credit scores.”

For us at DSD, it’s always felt wrong that it’s been an exclusive entity available only to certain subscribers, with limited accessibility to those who need it most…

In community solar’s journey as an asset class, it has been a challenge to secure financing in the face of uncertainty and hesitancy associated with extending capital as a tax equity backing when compared to a traditional power purchase agreement (PPA). But this ABS changes that.

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What’s next?

One of the main goals for the DSD team in securing the ABS deal was to set up something that would be replicable not just for DSD, but also other developers in the industry. By showing that community solar and C&I solar are stable and have a proven path forward, future deployment of these projects will be more financeable.

As a first-time issuer within a newer asset class, it was critical that DSD considered all relevant risks and strategized with agencies, consultants and our bankers to ensure an optimal outcome. This was no small feat, and took time, but with our first securitization under our belt, we look forward to future issuances which will continue to drive commercial solar adoption and widen access to community solar projects nationwide.