DBRS Morningstar Finalizes Provisional Ratings on HERO Funding 2020-1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following notes issued by HERO Funding 2020-1 (the Issuer):

-- $46,699,000 Class A Notes, Series 1 rated AAA (sf)
-- $7,700,000 Class B Notes, Series 1 rated BBB (sf)

The ratings are based on DBRS Morningstar’s review of the following analytical considerations:

-- Transaction capital structure, current ratings, and form and sufficiency of available credit enhancement.
-- Credit enhancement is in the form of overcollateralization, a Liquidity Reserve Account, and excess spread. Credit enhancement levels are sufficient to support the DBRS Morningstar-expected delinquency and loss severity assumptions under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested. For this transaction, the rating addresses the timely payment of interest on a semiannual basis and the payment of principal by the Scheduled Maturity.
-- The capabilities of Renovate America, Inc. (Renovate or the Company) with regard to originations and underwriting.
-- DBRS Morningstar performed an operational risk review of Renovate and considers the Company to be an acceptable originator of property assessed clean energy (PACE) assessments.
-- The legal structure and presence of legal opinions that address the true sale of the assets to the Issuer, the nonconsolidation of the Issuer with the Transferor, that the Issuer has a valid first-priority security interest in the PACE Bond Portfolio, and consistency with DBRS Morningstar’s “Legal Criteria for U.S. Structured Finance.”
-- Review of legal considerations specific to PACE.
-- Western Riverside Council of Governments, California Statewide Communities Development Authority, and the County of Los Angeles had validation judgments issued by the California Superior Court confirming that the PACE special tax liens and PACE Special Taxes are valid and enforceable obligations that conform to all federal and state laws. In addition, the judgments ruled that PACE assessments do not constitute the taking of private property without due process of law in violation of the fifth and 14th amendments to the U.S. Constitution or the California Constitution.
-- Missouri law does not require a judicial validation proceeding to validate PACE programs in the state. Missouri PACE legislation contains another provision, known as a the statute of repose, which requires challenges to PACE programs to be raised within a limited period of time. Similar to a validation proceeding, this provision bars challenges from any person after the specified time period has elapsed. DBRS Morningstar has been advised that the statute of repose has expired with respect to the Missouri Clean Energy District PACE program and that no claims have been raised.
-- Florida Development Finance Corporation had a validation judgment issued by the Circuit Court of the Second Judicial Circuit in and for Leon County, Florida, confirming that the PACE assessments are valid and enforceable obligations that conform to all federal and state laws. The judgment also ruled that the PACE assessments do not constitute the taking of private property without due process of law in violation of the fifth and 14th amendments to the U.S. Constitution or the Florida Constitution.
-- PACE Bonds acquired on subsequent Issuance Dates may include PACE Bonds from additional PACE programs that are not included in the initial PACE Bond Portfolio, which are subsequently permitted via an Indenture Supplement. Such PACE programs may be in states other than California, Florida, and Missouri with different program structures and features, including but not limited to different PACE administrators. With respect to any such additional PACE program and related subsequent Issuance Date, DBRS Morningstar will review the PACE program and its legislation, validity, provisions, and related parties (including administrators). Asset performance in such PACE program may be different from that of the PACE programs included in the initial PACE Bond Portfolio. With respect to any such additional PACE program and related subsequent Issuance Date, DBRS Morningstar will review the PACE program and its legislation, validity, documentation, and related parties (including administrators).
-- The Federal Housing Finance Agency (FHFA) has voiced concerns that residential PACE assessments have a lien status superior to that of existing mortgages underwritten by Fannie Mae and Freddie Mac. DBRS Morningstar has reviewed FHFA’s statements on the subject and notes that such statements do not challenge the validity of the PACE assessment as a valid special lien.
-- Servicing is performed by local county tax collection offices.
-- Protections afforded to special revenue collections under Chapter 9 of the U.S. Bankruptcy Code and certain structural features, including a County Reserve Account, mitigate commingling risks associated with the servicing of PACE assessments by local county tax collection offices.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is Rating U.S. Property Assessed Clean Energy (PACE) Securitizations, which can be found on dbrs.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883/dbrs-morningstar-provides-update-on-rating-methodologies-in-light-of-measures-to-contain-coronavirus-disease-covid-19.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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