hard · Asset-Backed Securities
In a Solar ABS transaction, a 'Tax Equity Partnership' sits between the homeowners and the ABS trust.
What happens during the 'Tax Equity Flip' (typically 5-7 years post-issuance) that impacts ABS investors?
- The homeowner's monthly payment increases significantly to compensate the developer for the loss of the federal tax subsidy.
- The ABS bonds are mandatorily redeemed at par using the proceeds from the sale of the solar panels to the homeowner.
- 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.
- The interest rate on the Solar ABS notes 'steps down' by 100 bp because the Investment Tax Credit (ITC) has been fully realized by the trust.
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