These are structures built into the securitization that protect investors from defaults, underperformance and other events that could affect the portfolio of assets.
How debt securitization got started
The stronger the credit enhancement, the higher the rating, though some of the "veteran" asset classes such as student loans and credit card receivables may receive investment grade ratings without as much credit enhancement as newer asset classes like solar ABS may require. Types of credit enhancements include:. Smaller deal volumes may not offer investors the kind of absolute returns required. Moreover, issuers benefit from larger deal sizes, as they keep transaction costs e. It is possible that other motivating factors, such as sustainability goals, or fund allowances for "unconventional assets" may be influencing investor decisions in these small solar deals.
Given the limited deployment of solar in most markets around the world, it can be difficult for one issuer to amass a large enough portfolio to make securitization an economical option. It is possible that financial aggregators—in essence, funds that purchase solar assets with the eventual intent of securitizing the portfolio—could act as a pathway to the capital markets for smaller developers.
However, this approach has not been widely applied in the marketplace. The existence and success of these aggregators will depend in part on the standardization of 1 contracts e. Standardization is one area where policymakers may assist in enabling renewable energy asset developers and owners access to the capital markets through ABS and other instruments. Establishing laws, promulgating best practices and pursuing a unified system of documentation can help ensure that projects can be aggregated and evaluated without a lengthy and costly due diligence process.
See a Problem?
This is critical to the development of a multi-issuer marketplace, which is how developers in some countries may have to access the securitization markets because of limited renewable energy development or capital markets access in their own. By facilitating project acquisitions, portfolio transparency and the credit ratings process, a strategic push to standardize various aspects of the project development and finance process has the potential to bring a significant amount of liquidity to the renewable energy industry.
The laws, regulations, financial engineering techniques, credit ratings methodologies, investor sophistication and other aspects of the securitization markets are all very well established in the United States after several decades of operation. Several other countries, particularly European countries, have active securitization markets as well, though the total value of outstanding European ABS was less than 0. Other countries, such as China and Singapore have securitization markets as well, but these are similarly dwarfed by activity in the United States. Without a mature and robust market infrastructure, securitization can be an exceedingly difficult strategy for any issuer—not just renewable energy developers.
It is therefore likely that if ABS securitization were to become a viable strategy to term-finance renewable energy assets in emerging economies, that financial aggregators may need to play a significant role by bundling projects and bringing them to the major financial centers of the world.
This is where securitisation helps: by bundling up the loans on their books which form part of their assets and selling them to outside investors, such as asset managers or insurance firms, banks can both slim their balance-sheet and improve capital ratios. But at some point markets will have to take over financing banks. Financial watchdogs are also keen on securitisation because they are confident that they can steer it along a different path from the one that ultimately wrought havoc in They believe that regulatory tweaks have made the practice safer.
Aware of the reputational risks of messing up again, they now spend more time dissecting three-letter assets than just about anything else in their portfolio. Regulators will have to make sure that they retain this newfound discipline. Join them.
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Securitization -- The Financial Instrument of the Future
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