Same trend prevails as seen in national data: below 700, charge offs start to get fairly significant.
58% above 700 = 44 million73% above 650 = 56 million Based on 76.5 million households
Re amp october 2011 1
RE AMP: NGO ROLES IN FINANCING (PRIMER ANDDISCUSSION)Matthew H. Brown, PrincipalHarcourt Brown & CareyOctober 16, 2011 Confidential
OUTLINE OF PRESENTATION RE AMP• Perspective and Context on Financing Efficiency• A Primer on Financing and Capital Sources Confidential 2
WHY FINANCING?? RE AMP• EE goals are getting more aggressive in some places.• Rebates and tax incentives may not be the most cost effective way to do the job. • Leveraged, private capital may be much more effective. IF it is designed effectively.• The trend towards tougher lighting standards mean that utilities will no longer have the least costly option available to them to reach EE goals.• Cost effectiveness tests are getting more challenging.• Ratepayers are getting more sensitive to higher rates.
SOME PERSPECTIVE RE AMP• Financing is Important. • It is a valuable marketing tool for energy efficiency. • It makes energy efficiency investment possible.• While literature is difficult to find on the effect of financing on contractors’ ability to “close” an energy efficiency deal, anecdotal evidence is that the influence is strong. • Close rates for a typical contractor deal are about 30%- 40%. • Close rates can increase by 20-30% from that number with attractive financing. • Interviews indicate that financing is one important factor that encourages people to make energy efficiency investments. 4
SOME PERSPECTIVE RE AMP• Almost no one wants financing.• But people want the stuff that financing lets them buy (granite countertops, furnaces, cars, homes…)• So: • Financing is NOT a silver bullet • Financing is a means to facilitate an end. Make financing seamlessly easy to access. • Financing programs need to be tightly integrated into every other element of marketing, rebates, etc.
Financing Strengths and Weaknesses RE AMPStrengths WeaknessesAllows leverage of public or utility Not all consumers have access to financeratepayer funds through credit because of credit qualityenhancements to attract private capitalSignificantly increases the amount of total Even consumers who may have goodcapital available by attracting new capital credit may not want to take on new debtsources to fund EE.Provides for “skin in the game” from Cost, time and labor intensive toborrowers originate, service loansSustainability: Extends the life of limited Requires careful design to price risk andgovernment utility ratepayer funds and figure out who bears credit risks andmay remove need for rebates in long run other featuresCan complement rebate programs 6
PRIMER ON FINANCING ROLES AND FUNCTIONS RE AMP Enhance Security •Loss Reserve •Tax lien •Debt Service Reserve •Mortgage •Loan Insurance •Fixture lien •Sub Loans Sources: •At the meter Who Lends?•Federal •Unsecured •State -•Foundations energy office •Utilities - HFA •Utility Lend Repay •Finance company •On Bill •Bank •Property Tax •Credit Union •CDFI •Other Fee •3rd Party Capital Sources •Banks •Credit Unions •Foundations •Bonding •Federal •Treasury •Utilities •Institutional Investors
WHAT IS THE ONE DETERMINANT OF RATE, TERMS AND AVAILABILITY OF CAPITAL? RE AMP• Every investor is going to decide whether to invest on the basis of analysis of credit.• While other factors are important, credit is critical. Confidential 8
MEASURING CREDITThere are many measures of credit such as: Residential Commercial** FICO Score Investment Grade Rating Debt-Income Ratio Years in Business Bankruptcy/Tax Lien Paydex/D&B/Other rating Home Equity Quality of Principals’ Credit **Particular measure will depend on size of the business (eg. Small businesses almost never have a rating). Confidential 9
NATIONAL DATA: CREDIT SCORE DISTRIBUTIONS RE AMPPercentile % of People Score Delinquency Rate Projected (Based on historical performance) 2nd 2% 300-499 87% 7th 5% 500-549 71% 15th 8% 550-599 51% 27th 12% 600-649 31% 42nd 15% 650-699 15% 60th 18% 700-749 5% 87th 27% 750-799 2% 100th 13% 800-850 1% 58% of people above 700 FICO (TransUnion). 73% of people above 650 FICO. 10
KEYSTONE HELP HISTORICAL CREDIT DATA RE AMP Original Current Wtd Avg. Cum. Charge Cum. C/O + Band Balance Balance Debt-Income Off 90 DPD <649 $826,686 $493,800 35.9 4.33% 7.15% 650-699 $6,001,189 $4,122,119 37.4 1.51% 3.52% 700-749 $11,762,134 $8,114,884 37.7 0.75% 1.41% 750-799 $16,011,449 $10,004,326 34.0 0.23% 0.71% 800+ $7,507,019 $5,238,058 30.8 0.03% 0.03% Grand Total $42,108,477 $27,973,187 35.0 0.60% 1.31% 11
MARKET SIZE BY CREDIT SCORE – BASED ON NATIONAL 61 MILLION OWNER OCCUPIED HOUSEHOLDS OWNER-OCCUPIED HOUSEHOLDS MARKET SIZE BY CREDIT SCORE: BASED ON 61 MILLIONCumulative # of % of People Score Delinquency RateHouseholds Projected 56 Million 15% 650-699 15% 44 Million 18% 700-749 5% 21 Million 27% 750-799 2% 10 Million 13% 800-850 1% 56 Million owner-occupied households would have a credit score good enough to minimally qualify for a loan (although credit score is one among many factors). 12
RISK AND FINANCING RE AMP Residential Commercial Outcome Low Risk • FICO score > • Investment 640/680 Grade • Debt-Income • 2+ years in Ratio no business Financing more than • Stable available 50% business • No environment bankruptcy • Good • Home equity management • Paydex etc High Risk Financing may be available, but at high cost Unmeasurable No financing Risk available Confidential 13
SOME OTHER FACTORS RE AMP• Time Horizon: • Banks want to be in and out of an investment in 3-5 years. • This time horizon mitigates their risk; trying to predict the world beyond that time frame is hard. • Unless they have some kind of security (a secured loan) that gives them ability to foreclose on a residential property. Business loans rarely go beyond 5 years. • Bonds may go beyond that period, but are generally for investment grade only.• Regulatory Compliance • State and federal regulators (through law and regulation) often: • Place a cap on certain kinds of assets a bank or other investor can hold (eg. No more than x% unsecured loans) • Prohibit certain types of companies from holding some asset classes (eg. Credit Union Service Organizations cannot hold unsecured loans, although credit unions can). • Require that financial institutions place cash reserves aside to cover the eventuality of loss from certain types of loans. • Etc. etc. etc. • Regulations and the willingness of regulators to allow financial institutions to hold the kinds of financial instruments that we are discussing will often dictate what a financial institution can or cannot do in this field. Confidential 14
WHICH INVESTORS WILL TAKE A LOWER RETURN FOR A GIVEN RISK IN RE AMP ORDER TO “DO THE RIGHT THING”?Less More 15
WHAT’S AVAILABLE RIGHT NOW?Residential CommercialFannie Mae Products available depend heavily on 15%+ risk adjusted rate, credit of company and size of company. no contractor buydown Rated companies have access to low cost available. Up to 10 year capital on their own, through traditional term. routes. Lease financing is common because many leases can stay off theWells Fargo/GE Money host company’s balance sheet. 24% rate, risk adjusted, bought down by However lease rules are changing, and contractor, term usu. 5 new methods of financing equipment years. Buy-down adds 8- purchase will become important to 10% to cost of project. locate. Energy service agreements may be the wave of the future for commercial property owners. Availability is subject to accounting rules. Confidential 16
CHARACTERIZING EE FROM A FINANCIAL INSTITUTION PERSPECTIVE• EE is: • Niche and small • For the most part residential EE loans are tiny ($7,500) • And total portfolios do not grow quickly or dependably enough to the size that interests big investors. • New • Meaning that most investors see don’t see them as a distinct asset class (which I think they are at least in residential), but view them like any other investment. • Low return and high transaction cost • Most of us want single-digit interest rates. • Transaction costs = $300-$600 to originate plus $10/loan/month, or $600 to service. $1,200 on a $7,500 loan is tough. Confidential 17
CHARACTERIZING EE FROM A FINANCIAL INSTITUTION PERSPECTIVE• EE is: • Requiring thought and a good deal of work. • It’s not a standard, run of the mill product – QECBs, PowerSaver, loan loss reserves etc. Are tough.• Therefore: • We need to work with the combination of players who will be able to: • Bring enough capital to the table • Be innovative and willing to think through details • Spend the time to understand the risks • And we need regulations that allow for: • Use of credit enhancements with ratepayer funds • Ability to consider on bill structures (but not requiring them). 18
CREDIT UNIONS Moderate to High regulatory compliance burden Generally not big risk-takers Includes:Capital Sources • Community Banks•Banks • Regional Banks Generally not big innovators –•Credit Unions • Money Center slow to enter new markets and•Foundations Banks can be slow to make decisions•Bonding (esp. big banks).•Federal•Treasury Low return requirements if credit•Utilities is well-understood. High return•Institutional Investors (or unwillingness to lend) if credit is not understood. Community, “mission” motivation varies, depending on bank size and location(money center, regional, community banks). Often not strong. Confidential 19
BANK-BASED PROGRAM: MASSACHUSETTS RE AMP• Utilities cover defaults on loans (but do not originate or service loans).• Participating banks offer a 5% loan with a minimum FICO score of 650.• Loan terms up to 24 months for small loans (up to $2,000).• Terms go to 7 years for loans up to $15,000.• Loan products for large residential and large C&I under development.• Negotiations conducted directly with the Mass Bankers Association.
CREDIT UNIONS Moderate regulatory compliance burden Willing to take on new projects if Fast-changing they align with mission.Capital Sources industry•Banks (decreasing by•Credit Unions 300 each year) Tremendous variability, but some•Foundations while total are willing to take on new•Bonding lending stays products even if they require•Federal steady. A mix of significant work.•Treasury traditional, old•Utilities CUs and more Low return requirements if credit•Institutional Investors ambitious new is well-understood. High return ones. (or unwillingness to lend) if credit is not understood. Community motivation varies, depending on bank size and location(money center, regional, community banks). Confidential 21
MICHIGAN SAVES: CREDIT UNIONS MICHIGAN SAVES• 60 million loan facility based on $3 million loan loss reserve .• 7% rate to borrower.• 10 year max loan term.• 640 and a higher FICO score required (about 56% of MI population qualifies).• Marketed through a contractor network.• Launched Sept 2010. • 56% approval rate. $3.5 million in loans made thus far.
FOUNDATIONS In addition to grants, Foundations make Program Related Investments (PRI) Consist of: PRIs need to be consistent withCapital Sources • Local•Banks the Foundation mission • Regional and•Credit Unions National•Foundations PRIs are investments of capital,•Bonding and while foundations may be•Federal willing to take some additional•Treasury risk, their risk appetite is quite•Utilities limited.•Institutional Investors Foundations may also be willing to put up balance sheet coverage for some investments. Multiple foundations are now investigating ways to put up Foundation capital in EE. Confidential 23
MACED (KENTUCKY) RE AMP• MACED, a Community Development Financial Institution (CDFI), received a grant from the Ford Foundation.• MACED then made loans to cooperative utilities that agreed to pay those loans back to MACED.• The utilities created an on-bill financing structure for energy efficiency retrofits in homes. • Utilities install energy efficiency measures as part of their essential services to customers. • Utilities can disconnect customers for non-payment. Confidential 24
BONDS Bond investors require the same credit quality as any other investor. Consist of: Certain types of bonds offerCapital Sources • Taxable•Banks government-subsidized interest • Tax Exempt rates – eg. Qualified Energy•Credit Unions • Tax Credit Conservation Bonds.•Foundations•Bonding•Federal Bonds offer access to long-term•Treasury capital – generally significantly•Utilities longer term than is available•Institutional Investors from a bank loan. Bonds rarely make sense for less than about $1,000,000, given issuance costs. Confidential 25
BOND FINANCING EXAMPLE: ST. LOUIS COUNTY• St. Louis County issued Qualified Energy Conservation Bonds (QECBs) in amount of $6,000,000.• Interest rate on bonds was ____.• St. Louis County takes credit risk on the bonds, and guarantees the repayment through an annual appropriation (not quite as strong as a blanket guarantee that isn’t subject to annual appropriation).• Federal government subsidizes the bond interest rate by paying the County 70% of an index (or between 3% and 3.5%).• Volume in the first month was ____.• We are working on establishing a similar program, but marrying QECBs with FHA PowerSaver, in Salt Lake County. Confidential 26
QECBS: HOW DO THEY WORK? Federal Government 70% of interest 30% of interest andIssuer (State/Local 100% of principal Government Entity) Investor QECB principal (loan) EE / GHG Reduction Project 27
(QECBS) BONDS ATION CONSERV D ENERGY QUALIFIE SOURCE: CAPITAL State QECB Allocation State QECB AllocationAlabama 48.4 New Hampshire 13.7Alaska 7.1 New Jersey 90.1Arizona 67.4 New Mexico 20.6Arkanasas 29.6 New York 202.2California 381.3 North Carolina 95.7Colorado 51.2 North Dakota 6.7Connecticut 36.6 Ohio 119.2Delaware 9.1 Oklahoma 37.8District of Columbia 6.1 Oregon 39.3Florida 190.1 Pennsylvania 129.1Georgia 100.5 Rhode Island 10.9Hawaii 13.4 South Carolina 46.5Idaho 15.8 South Dakota 8.3Illinois 133.8 Tennessee 64.5Indiana 66.2 Texas 252.4Iowa 31.2 Utah 28.4Kentucky 44.3 Vermont 6.4Louisiana 45.8 Virginia 80.6Maine 13.7 West Virginia 18.8Maryland 58.4 Washington 67.9Massachusetts 67.4 Wisconsin 58.4Michigan 103.8 WyomingMinnesota 54.2Mississippi 30.5 American Samoa 0.7Missouri 61.3 Guam 1.8Montana 10.0 Northern Marianas 0.9Nebraska 18.5 Puerto Rico 41.0Nevada 27.0 US Virgin Islands 1.1 28
UTILITY FUNDING RE AMP Typically will view lending and financing as outside their purview. Consist of: Generally not big risk-takers, butCapital Sources • IOUs•Banks IOUs will respond to a regulatory • Public Power mandate, esp. with cost•Credit Unions • Cooperative recovery. Coops and Munis can•Foundations often be greater risk-takers.•Bonding•Federal•Treasury Public power and coops often•Utilities very high on the “mission-based”•Institutional Investors scale. IOUs vary. Mission: Depends on utility type and need but generally view EE as secondary and financing as a bother. Confidential 29
MIDWEST ENERGY RE AMP• Tariff-based; obligation passes with meter. • 3% for most loans. • 15 years for residential. • 10 years for commercial. • Capital source: utility, ARRA. • Disconnection for failure to pay. • Financing charges cannot exceed 90% of average annual energy savings. • About 500 projects completed worth $2.5 million. • 0 defaults as far as known.
INSTITUTIONAL INVESTORS RE AMP Risk Averse Regulated: Cannot typically invest in non-rated securities (eg. Consist of: unrated loan portfolios)Capital Sources • Pension Funds•Banks • Insurance•Credit Unions Companies Typically require large•Foundations • Other Large investments before even thinking•Bonding Investors about investing.•Federal•Treasury Residential appetite: Unless•Utilities secured and bundled in large•Institutional Investors quantities, almost 0. Commercial appetite: For large, rated deals: signifiant. Confidential 31
BANK/UTILITY: ILLINOIS RE AMP• Legislation required utilities to develop efficiency financing programs -- $2.5 million each utility for a statewide total of $12.5 million.• Utility ratepayers would cover 100% of defaults.• A 3rd party entity conducts all loan origination and servicing. Capital source is still uncertain. Loan terms TBD. Contract awarded but not public.• Program size is limited to $12.5 million statewide.• Banks’ perspective: • Small, at $12.5 million • Looked only at credit of the utilities. • If they had had to look at individual credit, would not have done the program. • A program similar to this could be of interest to institutional investors – although it is too small to be of great interest.
FUNDS FLOW: SMALL LOANS <$20,000 CREDIT UNIONS Capital- Non-CU andFunding Providing SubordinatedPool Credit Unions Investors HB&C Green Energy CUSO Origination Loss and Servicing Reserve Full Loan Origination/Servicing Approved Contractors Property Owners
CAPITAL SOURCE: COMMERCIAL BANKS- Bank that provides general business banking services – transactional, savings, mortgages- Generally do not provide energy efficiency-specific products, but do finance mortgages and underwrite loans- Generally focused on short-term lending Major Firms Risk Tolerance Involvement in the EE Opportunities sector Bank of America, Relatively low • Financing ESCo • Secondary market Wells Fargo, U.S. contracts for development would Bank, Capital One, MUSH clients encourage Comerica • EE mortgages involvement • SBA loans • Standardizing and pooling loans 34
CAPITAL SOURCE: INVESTMENT BANKS- Bank that enables corporations and/or governmental institutions to raise capital via stock or bond sales. Also manages sales and trading of securities, and generally house an asset management group.- Investment banks are the intermediaries for bond financing (including QECBs)- Have historically eschewed EE because deal size was too small, security was weak and loans were non-standard Major Firms Risk Tolerance Involvement in Opportunities the EE sector Goldman Sachs, JP Depends on group - Early loan - Secondary market Morgan, Morgan within the bank, can be pooling efforts development would Stanley, UBS, Merrill low to high encourage involvement Lynch, Citi, Deutsche - Partnerships with Bank, Barclays, Credit financing companies (e.g. Suisse, plus regional Ygrene Energy Fund + firms Barclays, Hannon Armstrong and Metris) 35
CAPITAL SOURCE: BONDS• Project cost greater than $800,000• Expected useful life of assets being financed is greater than 5 years• District has enough cash flow (i.e. net revenues) to pay debt service• Other lower cost sources of financing are not available 36
(QECBS) BONDS ATION CONSERV D ENERGY QUALIFIE SOURCE: CAPITALNational bond volume cap for QECBs: $3.2 billionAnnual cash subsidy: 70% of interest costsStructure: Originally a tax credit bond, QECBs were converted to cash subsidy bonds in March 2010. This means a larger investor pool and lower rates on QECBs.Qualified purposes: Reducing energy in publicly-owned buildings by at least 20%; green community programs (including loans and grants to implement such programs); rural renewable energy; any qualified renewable energy facility; research on cellulosic ethanol, carbon sequestration, fuel efficiency, car batteries or building efficiency; mass transit facilities, demonstration projects, public education campaigns for energy efficiency.Eligible issuers: Cities, political subdivisions and conduit issuersUse of available project proceeds: 100% used for capital expenditures for qualified conservation purposesAllocation of volume cap: Allocated among states in proportion to the population, then allocated by population to cities and counties of more than 100,000.Private activity bonds: Up to 30% of each state or large local government allocation may be issued as private activity bonds, , where proceeds of the QECBs are loaned to non-governmental entities and used for energy conservation improvements on privately owned property. Private activity bonds may only be issued to finance capital expenditures.Issuance date: No expiration, proceeds must be spent within three years of issuanceIRS notice on QECBs guidance: http://www.irs.gov/pub/irs-drop/n-09-29.pdf 37