Renovate America capital markets md Craig Braun and capital markets svp Adam Garfinkle answer SCI's questions

Q: How and when did Renovate America become involved in the securitisation market?
Braun: We started originating PACE loans in 2012 and we securitised our first HERO bonds in 2014. PACE provides a financing alternative for homeowners when they need to replace aging heating or air conditioning units or make other energy efficiency or renewable energy upgrades.

PACE allows homeowners to pay for these upgrades over time through a voluntary assessment on their property taxes. Around one-in-six homeowners upgrade these home systems each year, but approximately three-quarters of the time they are not doing it with energy efficient products.

PACE provides a financing option that makes these more efficient alternatives more accessible to more homeowners. PACE is authorised by legislation in 32 states and the District of Columbia. Residential PACE is occurring primarily in California, where Renovate America and its HERO programme represents about 90% of the residential PACE market.

Garfinkle: Securitisation has allowed us to scale our platform. Overall, we have generated over US$1bn through six transactions. Our two most recent HERO bond transactions - HERO Funding Trust 2015-3 [SCI 27 November 2015] and HERO Funding Trust 2016-1 [SCI 15 February] - have been verified as 'green' bonds by a third party.

What sets HERO bonds apart is that they are backed by financing for home efficiency upgrades that have been completed, so certified environmental benefits are already being achieved. This is very appealing to investors who want to add green investments to their portfolio and want those investments to have a measurable impact.

Q: What are your key areas of focus today?
Braun: The HERO programme deploys private capital to achieve important public policy objectives - helping to lower utility bills, reducing carbon emissions, saving water, creating clean energy jobs and driving local economies - at no cost to taxpayers. It is the fastest-growing energy efficiency financing option in the US. There's been over US$1bn in funded projects in the programme's first four years.

These projects will save more than US$2bn on energy bills, conserve more than eight billion kWh of electricity, reduce emissions by more than two million tons and save more than three billion gallons of water. It has already created 10,587 jobs across California and has had a local economic impact of more than US$2bn.

Renovate America works with over 8,000 licensed and bonded contractors and maintains the most comprehensive consumer protection programme in the home improvement industry. HERO has created a powerful platform that connects homeowners with contractors, an automated database of over one million products rated as efficient and an underwriting team that can give approvals in minutes. This has helped more than 56,000 homes become more energy efficient and more affordable to power, heat and cool.

Q: How do you differentiate yourself from your competitors?
Garfinkle: Not only are our two most recent deals the first classified green bonds in the market, but they are unique because they are not speculative. What I mean by this is that the improvements made in households are already in place. So, unlike other green bonds which fund future projects and have potential environmental benefits, HERO bonds are backed by projects that are already installed and having a positive environmental impact today.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
Braun: Our latest deal - HERO Funding Trust 2016-1 - pushed over the US$1bn landmark in HERO bond securitisations. The PACE market in general is looking forward with bright prospects and demand is very strong.

The latest HERO bond deal created a real buzz, especially after the recent Paris Climate Summit. It was nearly 3.5 times oversubscribed. One challenge is that there is not enough supply in the market to meet demand.

Q: What major developments do you need/expect from the market in the future?
Garfinkle: PACE is definitely a rising sector in the market and there is a clear demand, but this demand could definitely see more diversification. Investors up until now like the credit quality in these deals and the value that they are getting, so this can be a good selling point.

However, as with any new sector, we need to get the message out. The broader the investor base, the larger the scope for it to grow.

Braun: Also, with risk retention coming in 2017, our compliance will start hitting in December of this year. We will meet European risk retention requirements by December 2016 and expect our transactions in 2017 to be available in Europe. At that point, we will be dual compliant for risk retention in both the US and Europe.

Regarding our timetable, we are bringing a deal to the market quarterly right now. That will stay the same for the foreseeable future.

We are projecting north of US$1bn in issuance this year. We anticipate these transactions will be certified green bonds as well.

JA