Deutsche Bank Leads First PACE-Backed ABS


Deutsche Bank is the lead manager on the first offering of securities backed by a portfolio of Property Assessed Clean Energy (PACE) bonds issued by Western Riverside Council of Governments (WRCOG).

Kroll Bond Ratings Agency assigned preliminary ‘AA’ ratings to the $104 million of class A notes issued by the deal, HERO Funding Class A Notes, Series 2014-1.

WRCOG’s PACE bond portfolio is secured by 5,898 PACE assessments levied against 5,890 residential properties located in the County of Riverside, CA. All of WRCOG’s clients are in Riverside but the company plans to expand into new jurisdictions throughout California and Florida.  

PACE programs have a short track record. State and local governments introduced PACE programs in 2008; as of December 2013, 31 states in the U.S. have passed legislation allowing municipalities to create PACE programs. The programs enable local governments to finance renewable energy and energy efficiency projects on privately owned residential, commercial, agricultural, and industrial properties, according to the KBRA presale report.

In the report, KBRA states that it used historical residential real estate tax default data for the county and surrounding counties as a proxy for PACE Assessment defaults. Borrowers repay PACE loans through long-term special tax assessments that local governments place on property tax bills. The average PACE Assessment for the deal is $18,273 with an average annual payment of $2,175.  

The ratings agency noted that PACE programs face still face significant roadblocks following decisions by Fannie Mae and Freddie Mac in 2010 not to purchase mortgages secured by properties with PACE special assessments subject to first-lien priority. “The Federal Housing Finance Agency, the conservator of Fannie Mae and Freddie Mac, believes that PACE liens with priority over existing mortgages are unlike routine tax assessments and contravene the terms of the Fannie and Freddie mortgages prohibiting such senior liens,” explained the KBRA report.

KBRA said that WRCOG obtained a final, non-appealable judicial order “affirming the validity, enforceability and seniority of the PACE liens,” however “FHFA’s public opposition indicates there is a risk the FHFA may challenge the validity of a PACE lien against a mortgagee’s security interest in federal court.

“A successful challenge may result in impairment of the PACE Assessments.”


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