Solar Securitization for Rwanda

About

About 70% of the population of Rwanda does not have access to the national grid, which has a deep impact on the country’s health, literacy and farming production indexes. This has led the national government to establish the goal of providing 100% energy access by 2022, mostly through off-grid solutions.

The local market for solar home systems has been responding to this demand, with the number of connections reaching 256,000 households today, most of which are financed by loans from local financial institutions to local energy developers. However, the developers’ inability to provide substantial collateral has been an important hinderance to the expansion of this market – an average of 1.25x collateral is required in the form of cash, corporate guarantee, receivables etc. Solar securitization presents a critical opportunity to overcome this barrier by providing off-balance sheet debt to energy developers and accelerating the cash flow from loan proceeds, giving them the ability to more rapidly expand to new customers.

The Solution

Solar Securitization for Rwanda pools solar home system loans into a tradable asset-backed security, providing energy developers and households with access to lower-cost, long-term, off-balance sheet finance, while enabling institutional investors to access the local solar loan market.

Solar Securitization for Rwanda is the first initiative to offer solar-asset backed securities in Rwanda, which can expand available investment for developers of solar home systems. The instrument will provide off-balance sheet debt to local solar home system developers. In addition, selling a portfolio of loans as a single asset-backed security will enable the solar developers to accelerate the cash flow from their loans to expand the reach of their solar home systems throughout Rwanda. Pooling loans from several developers will ensure a strong pipeline and high penetration of solar home systems in Rwanda.

Implementation and Impact

The instrument is under development by BRD, the Development Bank of Rwanda, an institution with over 50 years’ experience in development finance and about 15 years of actively financing the local energy market. Other partners such as the trustee, rating agency and SPV managers are being selected. The instrument will initially tap into an existing portfolio of US$ 10 million of solar home system loans, and eventually be scaled-up to other areas in the country as well as other East African countries. At its initial phase, it will target the 3-5 major solar developers in the country in order to reduce variability in the initial asset pool. The instrument has the potential to lower household energy spending by US$ 30 per year and reduction of 0.08 tons of CO2e per kerosene lamp replaced.

Design

Solar developers will generate loans and install the systems in customer households. Once construction is finished these loans become eligible for securitization, and they are pledged to a special purpose vehicle (SPV). The loans are analysed by an underwriter using a risk-based pricing methodology, determining different tranches of risk to suit different types of investors. The SPV Trustee then sells the security to investors. Proceeds from the sale go to the solar companies, who service the investment with repayments from customers (via the SPV Trustee).

The potentially high asset-variability entailed by this strategy can be addressed by a standardization of contracts sizes, terms and tenor. Credit/underwriting risk will be mitigated by the application of strict underwriting principles, a multi-tranche strategy and a credit enhancement facility, to be drawn only in the case of non-payment.

Flickr photo credit: United Nations Photo