Tesla is setting new standards in renewable energy financing with its latest solar asset-backed securitization (ABS) deal, receiving an unprecedented AAA rating.
Fitch analyst Hebert Soares notes that Tesla’s integrated business model, which transcends traditional sales channels, may lay the blueprint for achieving high-level credit ratings in a sector often constrained by data and regulatory scrutiny.
It is the first classification of its kind for the residential solar market. According to Soares, this deal, backed by high-quality assets and Tesla’s unique direct-to-consumer approach, is unique. It could redefine the standards for financing access and benefit-sharing in renewable energy.
The offering includes two tranches: a $255 million Class A-2 with a weighted average age of 2.65 years, and a $150 million Class A-3 with a weighted average age of 6.2 years. Both were rated AAA, highlighting the asset quality and deal structure.
Tesla’s use of a sequential payment structure prioritizes returns to senior bondholders and contrasts with the more typical “pro-rata” structures used by other solar ABS deals. “Serial structures have more solid cash flow outcomes,” Soares said, and this was one of the factors that helped Fitch give the AAA rating, as they better withstand potential losses.
Tesla’s sterling borrower pool also supports its highest investment grade rating.
The Tesla borrower’s average FICO score of 793 and a 13% down payment reduce the risk of default. The borrower’s high credit quality and commitment through a large down payment create a personal stake in the system. This is very different from other models, where third-party partnerships are more common, and service providers rely on expensive sales staff or in-store displays from large retailers.
Tesla’s borrowers’ results stand out in a market where solar ABS deals are generally capped at AA due to limited historical data and regulatory scrutiny. This limitation typically arises from a scarcity of data and ongoing legal scrutiny of consumer disclosures, Soares noted.
The deal contains multiple layers of credit protection designed to mitigate investors’ cash flow risk. These features include over-collateralization, which ensures that the value of assets exceeds loan amounts, and the Yield Supplement Collateralization (YSOC) feature, which adjusts cash flows by supplementing returns on low-interest contracts. These mechanisms support a fixed rate of return for investors and contribute to an increase in credit ratings.
Tesla’s success may impact other solar companies’ financing strategies, but it has set a high bar.
The high-quality borrower pool, direct sales and efficient cash flow structure make this a unique deal that competitors may need to emulate to attract similar investor confidence.
“When we look at Tesla’s filing and the pool, those were the primary drivers that led us or allowed us to assign AAA ratings to the senior notes of the ABS,” Soares said.
Investor enthusiasm for solar ABS remains strong despite industry challenges, including recent setbacks such as the SunPower bankruptcy and the downgrades of solar ABS from Sunnova and Solar Mosaic. Including the Tesla deal, total issuances in the solar ABS market this year have now exceeded $5 billion, a new record.
Tesla’s achievement may also impact financing methods across the renewable energy sector. Tesla could become a model for securing high ratings through streamlined processes and borrower strength.
But that may still be some time away. “At this point, we do not see us raising or removing the rating cap on other originators until we have greater visibility into potential developments on the legal side,” Soares said.
