KBRA Comments on U.S. Solar Loan ABS Monitoring

Kroll Bond Rating Agency (KBRA) completed a review of all of its outstanding ratings on $2.9 billion of U.S. Solar Loan ABS securities to determine those most at risk to the COVID-19 economic disruption. The review of the 631 securities considered the structural provisions of the transactions and the priority of each security in the transaction’s capital structure. As a result of the review, KBRA is not effectuating any Watch Placements but will continue to monitor the transactions in conjunction with our ongoing surveillance process.

The process used to review the securities was analogous to that used to review ratings on other ABS ratings in a number of sectors, including auto loans, consumer loans, and credit cards. Expecting the rise in unemployment to inevitably impact the performance of residential solar loans, KBRA analyzed the relationship between the historical unemployment rate and annualized gross loss rates through the 2008-2009 financial crisis for different types of lending products.

KBRA then considered how that relationship could drive credit performance in the subject transactions in a recessionary environment over the next two quarters, which would be followed by a recovery beginning in 4Q2020. This analysis was used to guide adjustments to KBRA’s base cumulative net loss for each transaction, with the overarching goal of ensuring our ratings are in alignment with our published ratings definitions.

In the analysis, KBRA considered and analyzed each transactions’ performance, structure and break-even loss coverage multiples assuming an increase in defaults resulting from the economic slowdown and increase in unemployment rates. In addition, KBRA considered information based on communication with issuers and servicers. Along with offering current borrowers payment relief through hardship plans, many issuers are tightening underwriting standards and reducing origination volume in the near term, which will likely affect their financial condition.

The 17 securitizations are collateralized by solar loans that are generally secured by solar energy systems, which convert the sun’s light into usable energy that consumers can use to power their homes. The loans in the transactions are typically made to borrowers with prime credit scores (mid-700s), have terms ranging up to 25 years, and relatively low APRs (4-6%). One consideration that may mitigate the impact of COVID19 in the sector is that the systems often provide utility savings to system users.

Solar loan issuers and servicers have begun to offer borrowers temporary financial hardship plans, such as modifications, extensions, or deferrals to their loan payments. From conversations with issuers and servicers as well as from receiving supporting data, KBRA has observed that the percentage of borrowers on these plans is low. In most cases, as a percentage of the outstanding ABS pool or portfolio balance, the borrowers on hardship plans compose of less than 1.00%. However, the data is from the March and April time period and is expected to rise owing to the economic dislocation caused by COVID-19.

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