(Bloomberg) — European investors accustomed to buying repackaged mortgages and auto loans are getting another type of asset-backed collateral to invest in: bonds backed by solar panel loans.

Perfecta Energia and HomeTree Marketplace Ltd. plan to sell repackaged solar panel loans in the public debt market, according to company executives. They will follow a successful venture by Enpal GmbH, which recently became the first company to sell a security backed by solar panels on the widely syndicated market in Europe. The German renewable energy firm is also planning more emissions in the future.

The deals are set to open a new frontier for asset-backed debt in Europe, where securitization has been used for years to sell mortgages, autos and consumer loans to investors. Such transactions roll up the loans into a new instrument and sell them through a special purpose vehicle, de-risking the company’s balance sheet. They are also seen as a way to boost the adoption of solar panels by reducing the upfront costs for consumers.

“The Enpal deal is good news for everyone,” said Borja Saez, co-founder and chief executive of Madrid-based Perfecta Energia. “The price seems very attractive and well designed. There will definitely be more deals on the way.”

Saez said his firm is planning a deal in the next 18 months, once it sells enough solar panels to underwrite a deal of at least 150 million euros ($161 million). Hometree is also exploring doing a deal, possibly in 2026, according to founder and chief executive Simon Phelan. “There is clearly a wall of appetite for such instruments in both the public and private markets,” he said.

Strong demand for Enpal’s business bodes well for other potential borrowers. At one point, one of the deal’s tranches — the third-largest Tranche B — was covered more than 9 times by orders, allowing the company to tighten its pricing, according to a person familiar with the deal who asked not to be named. . The other tranches had enough demand to cover them several times over, the person said.

Enpal also plans to be a repeat issuer. “When you look at the automotive industry and their captive financing units – they are big users of ABS to get very attractive financing costs,” said Béla Schramm, director of securitization at Enpal, referring to domestic financing businesses of customers of car companies. “Over time we would like to be in a similar place,” he said.

While demand for Enpal’s business has been strong, the nascent nature of the asset class means risks are hard to gauge, leaving some questions surrounding this type of debt. Finally, the technology these ABS are based on is still in its infancy and there are issues with both the lack of sun and energy storage facilities in Europe.

Douglas Charleston, who heads ABS at TwentyFour Asset Management, a London-based money manager, acknowledged that the asset class remains untested at this early stage. However, “German consumers who take out these loans are really very much in the prime category and so even if the equipment breaks down, the loans are guaranteed and will be repaid anyway,” he said, referring to the Enpal business .

Risk assessment

Rating agencies have also weighed in on the risks, with Moody’s Ratings provisionally rating the various tranches of Enpal’s deals between Aaa and B2. That’s somewhere between where a regular mortgage-backed security and a consumer loan-backed security on the lower-rated tranches would rate, according to Moody’s credit analyst Armin Krapf.

“Since the loans are from homeowners, the quality is better than unsecured consumer loans,” he said. On the other hand, the securities are riskier than auto loan-backed instruments because the underlying loans have maturities of about 20 years, compared to about three years for a typical car finance, he added.

Investors evaluating the new asset class could also turn to the US, where solar-backed deals from renewables companies have been growing for some time.

Still, the U.S. solar ABS market is currently going through a somewhat turbulent time, with SunPower Corp., one of the country’s top five residential solar installers, filing for bankruptcy earlier this year and raising concerns about the industry at large. Donald Trump’s victory in the US presidential election also means that the US will prioritize fossil fuels over renewables in the coming years, which could affect demand for solar panels.

But European operators hope that investors will consider the differentiating factors between the two regions.

“The US is a more aggressive market where more players are competing and doing things like inflating the price of renewables in exchange for a reduction in the loan interest rate,” Hometree’s Phelan said. “We don’t think Europe will make that mistake, and it would also be harder to do in the higher interest rate environment we have today.”

–With assistance from Scott Carpenter and Charles Williams.

©2024 Bloomberg LP