hard · Asset-Backed Securities asset-nuances

What happens during the 'Tax Equity Flip' (typically 5-7 years post-issuance) that impacts ABS investors?

1. The homeowner's monthly lease or PPA payment increases significantly to compensate the developer for the sudden loss of the underlying federal tax subsidy passed through.
2. The ABS bonds are then mandatorily redeemed at par well ahead of their originally scheduled maturity date, using proceeds from the outright sale of the solar panels and equipment to the homeowner.
3. The majority of the project's cash flows shift from the tax equity investor (who has already received their tax credits) to the developer/trust, increasing the debt service coverage.
4. The fixed interest rate on the outstanding Solar ABS notes automatically 'steps down' by 100 bp because the Investment Tax Credit (ITC) has been fully realized and exhausted by the trust.

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