Property-assessed clean energy (PACE) is an innovative mechanism for financing energy efficiency and renewable energy improvements on private property. PACE allow governments to fund the up-front cost of energy efficiency improvements on commercial and residential properties, which are paid back over time by the property owners. This allows a property owner to implement improvements without a large up-front cash payment. Improvements are repaid over 10 to 20 years through property assessments, which are secured by the property itself and paid as an addition to the owners’ property tax bills.
The 11 year, double-AA rated bond was priced at a fixed coupon of 4.75% and was extraordinarily well received by investors which included large US insurance companies and asset managers. Deutsche Bank acted as sole structuring agent and sole book runner. The deal is listed on Bloomberg, under ticker ‘HERO 2014-1A A Mtge’.
Michael Cheng, a Director in Structured Credit, Corporate Banking & Securities, led the transaction: “This innovative energy efficiency deal demonstrates Deutsche Bank’s financial expertise and our commitment to sustainability. If more governments create similar on-bill financing mechanisms, this will help unlock investment that creates jobs, reduces energy costs and carbon emissions and improves energy security.”
Deutsche Bank’s Global Transaction Banking business has also taken on the role of trustee and paying agent for California PACE programs. Over the past two years, California’s PACE program has helped over 6,000 property owners to make energy efficient upgrades to their homes, which will reduce their annual energy consumption by over 67 gigawatts and reduce annual CO2 emissions by 17,000 tons.
This bond is one of a growing number of ‘Green Bonds’. Already more than $4.5bn of green bonds have been issued in 2014, compared to $11bn in 2013 and $2bn in 2012. Deutsche Bank and 12 other banks recently published Green Bond Principles for designating, disclosing, managing and reporting on the use of proceeds from a Green Bond.
In total, 31 states and the District of Columbia having adopted PACE enabling legislation. This emerging market is at a pivotal moment. The transaction packaged municipal bonds issued by Western Riverside Council of Governments, and carried innovative structural features which protected investors against credit and extension risk of the underlying assessments as well as the bankruptcy risk of Riverside County, who collects the underlying PACE special assessments.
A PACE assessment is a debt of property, meaning the debt is tied to the property as opposed to the property owner(s), so the repayment obligation may transfer with property ownership. This eliminates a key disincentive to investing in energy improvements, since many owners are hesitant to make property improvements if they think they may not stay in the property long enough for the resulting savings to cover the upfront costs.