Mosaic is returning to the securitization market with another $259.7 million of bonds backed by solar loans. This time, the specialty finance company is contributing all of the collateral for the transaction.
That’s a change from Mosaic’s previous transaction, completed in July 2018, which included collateral that Mosaic had previously sold to Goldman Sachs. Mosaic relies on a combination of warehouse lines of credit, whole loan sales and securitization to fund lending. A September 2018 agreement to sell $300 million of loans to Goldman over a fixed period of time provided the young company with a vote of confidence at a time when it was still unprofitable.
Mosaic now appears to be in a stronger position financially. Kroll Bond Rating Agency reports that the privately held company expects to report that it swung to a profit in 2018.
The credit characteristics of the collateral for the latest deal, Mosaic Solar Loan Trust 2019-1, are also stronger than those of the previous deal, Mosaic 2018-2-GS. This allows Mosaic to obtain a slightly higher credit rating for the senior notes (A vs. A-) from Kroll Bond Rating Agency, despite offering less credit enhancement (17.23% vs. 23.04%).
The most notable improvements, per Kroll, are an increase in the minimum FICO score (650 vs. 640) and weighted average FICO score (752 vs. 741) of borrowers. The rating agency cited these changes as one of the reasons it expects a smaller percentage of loans to default, in its base-case scenario (5.51% vs. 7.2%). However, the loans backing the latest deal are also less seasoned (7 months vs. 10 months).
There are also differences in the capital structures of the two deals: Mosaic 2019-1 will issue two classes of notes, while Mosaic 2018-2-GS issued four classes of notes. In addition to the senior, A rated tranche, there will be a subordinate tranche rated BB-. By comparison, Mosaic 2019-1 had three subordinate tranches rated BBB-, BB- and B. The BB-rated tranche of the latest deal benefits from significantly less credit enhancement than the comparable tranche of the prior deal: 6.2% vs. 13.9%.
As the sole sponsor of the deal, Mosaic will retain at least 5% of the initial principal amount of each the two classes of securities to be issued, in order to comply with risk retention rules. For 2018-2-GS, by comparison, Goldman Sachs retained an uncertificated interest in the issuer, including the right to receive distributions.
While the credit characteristics of the latest deal are somewhat safer, there are other risks that investors need to consider. The cost of installing solar equipment on borrowers rooftops is rising, albeit from historic lows, in part due to tariffs the the U.S. recently introduced. And as the pace of solar installation slows, the resulting competition is putting financial pressure on installers.
Also, the structure of Mosaic’s loans, which is designed to encourage borrowers to use a tax incentive to prepay the loan, could result in higher monthly payments and default. Borrowers are offering an initial low monthly payments, but this payment increases unless they repay at least 30% of the balance within the first 18 months. Kroll notes that this type of loan “may potentially invite the scrutiny of consumer protection regulators,” though
the the structure and all consumer disclosures have been informed “by a thorough legal review process.”