Fledgling euro solar ABS plots different course to US

European ABS investors saw just the second solar loan-backed deal price recently, a German offering titled Golden Ray 2. The transaction marks a further incremental development towards sustainable financing in the European securitisation market. It also comes at a time when the much larger and established US solar market has encountered headwinds.

Enpal’s second European deal was backed by a €303m portfolio of loans to German consumers to purchase residential solar systems, as well as heat pumps, a new feature in this transaction. The characteristics of the heat pump loans are very similar to the solar loans, albeit with a shorter average life, and therefore we consider their risks to be akin to standard unsecured consumer loans.

As we noted at the time of Enpal’s debut transaction, the platform has a limited historical track record, but it has shown stable performance in the past year with low delinquencies, reflecting its “prime” German homeowners. A year into the first transaction, cumulative defaults total a very modest 0.1%.

This stands in stark contrast to the turmoil the solar sector has seen in the US in the past year, where a number of bankruptcies – including two securitisation sponsors, Sunnova and Mosaic – have occurred. The primary driver of this has been the withdrawal of US government subsidies, as well as some adverse selection in the asset pools. Specifically, there has been some evidence of “barbelling” in terms of borrower credit quality (observed via FICO scores).

Consequently, the average constant default rate for US solar ABS is 2-3%, with the worst performing deals at 4% while European peers remain steady at around 1%. As a result, since mid-2024 there have been 53 rating downgrades on US solar ABS deals. The fundamentals continue to look challenging, with the industry facing significant headwinds, including higher interest rates and lower prepayment rates from slower house sales compounding the effect of unfavourable government policies.

Enpal’s Golden Ray 2 meanwhile enjoyed strong demand, with its investment grade mezzanine bonds attracting coverage of 4-5 times. We saw the best value in the Aa3 rated senior tranche, which was priced at Euribor+94bp, interestingly 9bp wider than the inaugural deal and providing a premium to other comparable auto and consumer ABS deals in our view.

The clear divergence between US and European performance partly originates from borrower quality and policy shifts, but it gives investors good reason to be cautious  in solar ABS, a rapidly developing asset-backed market where newer lenders and newer asset types, without the benefit of a full cycle’s worth of performance data, can create analytical uncertainty.

Being able to “feel your way” into the sector using relatively risk-remote senior bonds is a compelling option, particularly when we think senior bond pricing there is favourable versus saturated mezzanine bond spread in other consumer ABS markets. Enpal’s return to the securitisation market is a rare 2025 example of financing sustainable energy solutions, in an otherwise lacklustre year for green transactions.