- In our view, solar Lending represents a unique opportunity for outsized returns relative to risk.
- The Solar Loan market is currently at an inflection point of maturation, with over $27 billion in loans securitized since 2016.
- Borrowers are typically motivated by electric supply stability, savings and sustainable motives.
- Loans generally come with high quality borrowers, standardized structures with fixed-rate terms and full amortization, disbursement of capital directly to solar installers, adoption rates of 97% for automatic payments, and eligibility for a 30% tax credit.(2)
- Underwriting considerations include FICO scores, ID match, etc., plus income/employment verification and approved vendor list for solar panels.
- System monitoring ensures expected performance is met and corrective actions can be taken if needed.
In 2022, $8.6 billion of solar loans were securitized, up from $1.4 billion in 2016. In total, over $27 billion of loans have been securitized to date. Over the past decade solar installations have grown an average of 33% year over year.(3) Robust growth has led to institutional adoption, while the asset class remains relatively small and nascent. Said another way, the solar loan market is at an inflection point of maturation to provide reliable performance data without being an efficient market. This opens the opportunity for compelling gross returns. But, the below factors lead to a strong risk profile that we believes supports continued attractive net returns.
That safety is driven by a few key factors:
1. A Solar Loan’s Structure
With growth and maturity comes standardization. Today, the solar loan is widely standardized across originators which enables simpler analysis for all parties: the person explaining the loans, the borrower, and those investing in the loans after origination. Solar loans are typically fixed rate loans over a defined term (generally 20-25 years). The loans are fully amortizing which results in a simple monthly payments without hidden adjustments. This means borrowers understand what they are purchasing at the time of origination. In addition, solar installations are eligible for a 30% tax credit which borrowers often use to make one lump sum payment and re-amortize their loan to lower their monthly payment. These accelerated cashflows further drive default risk down. Originator money disbursement practices can also increase lending success. During origination, the capital is sent from the lender directly to the solar installer (significantly reducing the risk of misappropriation of funds) and the homeowner must approve the installation before the installer is paid in full (mitigating installation quality and fraud risks). Finally, originators incentive borrowers with a 0.50% rate decrease if they sign up for automatic payments (ACH) at the time of origination leading to industry wide adoption rates around 97%. Auto-pay dramatically reduces payment delays and delinquencies.
2. Borrower dynamics – It’s important to consider who is going solar and why they are doing so.
A solar borrower is not desperate to go solar, and thus doesn’t ‘need’ the loan. They have a utility connection that can deliver power, but are choosing to go solar for reasons that commonly include some combination of electric supply stability, savings, and sustainable motives. The old adage, you never want to lend to someone who needs the loan holds true today and is increasingly a hard dynamic to find. In addition, solar borrowers can typically only obtain one solar loan. This should remind you of the counter-example in 2007 when consumers could qualify for a seemingly unlimited amount of mortgages. Finally, loan amounts generally scale with the home value (and solar borrowers are required to own their home).It’s difficult to have a homeowner with a $200,000 home receiving a $100,000 solar loan – the system would simply be too large to be approved for permitting and utility interconnection.
3. Consumer Underwriting & Borrower Quality
The weighted average FICO credit score historically of solar loans is 740 – while averages can distort risk – loan purchasers are able to set minimum FICOs, of which SOLRX is 680 ensuring we only purchase prime and super prime debt. On top of FICO scores, other underwriting considerations for solar lending include: ID match, Total Debt to Total Income Ratio, Home Loan to Value, Mortgage Debt to Income Ratio, Unpaid Civil Judgements, Unpaid Tax Liens, Outstanding Collections, Current Negative Trade Accounts, Historical Negative Trade Accounts , Estimated Cost-Per-Watt Installation Cost, Loan Amount, Bankruptcies Past 10 Years , Credit Inquiries Past 24 Months. Further, in many cases income and/or employment is verified.
4. Solar Panels
Solar panel technology has improved greatly, though there remain manufacturers that don’t provide warranties or are known to have poor quality panels. Today, some panels are actually warrantied for 30+ years. While this may seem crazy, consider the fact that solar panels have no moving parts – they just sit on the roof, somewhere very few people come in contact with. This is to say, panels are pretty low maintenance. Still, lenders maintain an ‘approved vendor list’ to avoid any known bad manufacturers. Loans are secured by the solar panels themselves with a UCC-1 statement. UCC-1 is a fixture filing – a fancy way of saying that when taking out a solar loan, the lender also receives a lien on the fixture attached to the home. The primary benefit here is that the homeowner cannot refinance or sell their home without having the fixture filing removed. The secondary benefit is that the lien gives the lender the right to “repossess” the panels in the event of non-payment. The model works ok with an auto loan in which the lender can reposes the asset (key factor here is the asset has wheels and is mobile), solar panels themselves really aren’t that mobile: they are bolted to the house after all and you cannot take the investment tax credit on ‘used’ panels. However, with diligent servicing, the lender can remotely repossess the solar panels: In the event of non-payment, the lender can disable the system electronically, rendering it useless. So long as the homeowner was receiving savings compared to their utility, there is a strong incentive to ‘come current’ on your loan to have the system turned back on. Further, the lender’s ability to monitor the system offers the ability to ‘get ahead of’ defaults.
A typical customer that installs solar can save upwards of 20% overall on the funds spent on electricity monthly. Solar does not eliminate the need for a utility electric bill (at least not yet, but batteries are changing this), but the savings generated by the panels plus the cost of a solar loan typically fall well short of the old utility bill. Further, as utility rates continue rising the homeowner is further benefiting, and the lender has potentially increased security. More specifically:
The Utility Bill without solar is typically more than the combined costs of the Solar Loan and the remaining utility bill for electricity usage not covered by the panels.
This equation is key. Electricity is typically one of the last payments a borrower will default/go delinquent on. As noted in above, panels are shut-off remotely in the event of non-payment. This dynamic means that a rational actor will likely continue to make their payment as delinquency on a solar payment drives actually drives their overall costs for electricity up as the panels are shut off and the borrower is forced to rely on utility power at utility rates.
6. System Monitoring
The same technology that allows the lender to remotely shut down a panel also enables system level monitoring. Lenders have expected system performance numbers from the underwriting process and monitor systems to ensure that these expectations are met. While most systems are installed without issue, installers are human and can make mistakes. Some common issues with install are 1) failure to properly connect panel wiring 2) failure to connect the system monitor to the internet (either Wi-Fi or cellular), and 3) failure to follow the install plan (installing on the wrong side of the house). Monitoring allows lenders to investigate underperformance and take corrective action to fix issues to ensure that solar borrowing does not become a burden that breaks the solar outlined in point 5. Lenders have a vested interest in ensuring that the panels perform properly as outlined in Point 2 as savings help drive payments. In the event a system underperforms, they can investigate and take corrective action to ensure that solar borrowing does not become a burden that breaks the equation outlined in point 3.
Currently, 90+ day delinquencies for historical U.S. Solar loans are at 0.18%. for reference, mortgages are at 0.50% and auto loans are at 3.73%. And yet, solar loans yield 200-400 basis points (2.00-4.00%) over mortgages and auto loans.(1)
It is for all of these reasons that we believe solar loans present a great risk-adjusted opportunity where an experienced manager can generate excess yield in an evolving market.
- KBRA 2023 ABS Sector Outlook: Navigating an Evolving Market
- European Solar ABS: Potential to Support Green Transition
Investors should carefully consider the investment objective, risks, charges and expenses of the Fund before investing. This and other important information about the Fund is in the prospectus which can be obtained by contacting your financial advisor or by calling 844‐4‐FINITE. The prospectus should be read carefully before investing.
Current and future holdings are subject to change and should not be considered a recommendation to buy or sell a security.
The Finite Solar Finance Fund is distributed by Foreside Fund Services, LLC. SOLRX is a closed end interval fund
An investment in the Fund is not suitable for investors who need certainty about their ability to access all of the money they invest in the short term. You may not have access to the money you invest for an extended period of time.
The Fund has implemented a Share repurchase program, however, the Fund is not required to repurchase more than 5% of its outstanding Shares each quarter. Shares will not be redeemable at a Shareholder’s option nor will they be exchangeable for Shares of any other fund. Investors should therefore consider Shares of the Fund to be an illiquid investment. You should not expect to be able to sell your Shares (other than through the repurchase process), regardless of how the Fund performs.
Because you will be unable to sell your Shares at the time of your choosing or have them repurchased immediately, you will find it difficult to reduce your exposure on a timely basis during market volatility.
Although the Fund is not permitted to invest in loans that are of subprime quality at the time of investment, an investment in the Fund’s Shares should be considered speculative and involving a substantial degree of risk, including the risk of loss of investment. There can be no assurance that payments due on loans or other alternative lending‐related securities in which the Fund will invest will be made.
At any given time, the Fund’s portfolio may be substantially illiquid and subject to increased credit and default risk. The Shares therefore should be purchased only by investors who could afford the loss of the entire amount of their investment.
The Fund intends to accrue and declare dividends daily and distribute them on a quarterly basis; however, the amount of distributions that the Fund may pay, if any, is uncertain. The Fund may pay distributions in significant part from sources that may not be available in the future and that are unrelated to the Fund’s performance, such as from offering proceeds, and borrowings. A portion or all of any distribution of the Fund may consist of a return of capital and may result in potentially adverse tax consequences to the Fund or its shareholders.
The Fund’s distribution policy could result in a return of capital, resulting in less of a shareholder’s assets being invested in the Fund and, over time, potentially causing the Fund’s expense ratio to increase.
The distribution policy also may cause the Fund to sell a security at a time it would not otherwise do so.
If the borrower of the loan or other alternative lending‐related security in which the Fund invests is unable to make its payments on a loan, the Fund may be greatly limited in its ability to recover any outstanding principal and interest due under such loan, as (among other reasons) the Fund may not have direct recourse against the borrower or may otherwise be limited in its ability to directly enforce its rights under the loan, whether through the borrower or the platform through which such loan was originated, the loan may be unsecured or undercollateralized, and/or it may be impracticable to commence a legal proceeding against the defaulting borrower.
Substantially all of the Solar Assets in which the Fund invests will not be guaranteed or insured by a third party or will not be backed by any governmental authority.
Prospective borrowers supply a variety of information regarding income, occupation and employment status (as applicable) to the alternative lending platforms that may originate or source loans. As a general matter, platforms do not verify the majority of this information, which may be incomplete, inaccurate, false or misleading. Prospective borrowers may misrepresent any of the information they provide to the platforms.
Under the 1940 Act, the Fund may utilize leverage through the issuance of preferred stock in an amount up to 50% of its total assets and/or through borrowings and/or the issuance of notes or debt securities in an aggregate amount of up to 33 1/3% of its total assets which could magnify losses as well as gains.. There can be no assurance that any leveraging strategy the Fund employs will be successful during any period in which it is employed.