DBRS Morningstar Assigns Provisional Ratings to PACEfunding 2020-1

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following notes to be issued by PACEfunding 2020-1 (the Issuer):

-- $90,055,000 Class A, Series 2020-1 rated AAA (sf)
-- $2,785,000 Class B, Series 2020-1 rated AA (sf)
-- $10,165,000 Class C, Series 2020-1 rated BBB (sf)

The ratings are based on a review by DBRS Morningstar of the following considerations:

-- The transaction assumptions consider DBRS Morningstar’s set of macroeconomic scenarios for select economies related to the coronavirus, available in its commentary “Global Macroeconomic Scenarios: June Update,” published on June 1, 2020.
-- The updated assumptions consider the moderate macroeconomic scenario outlined in the commentary (the moderate scenario serving as the primary anchor for current ratings). The moderate scenario assumes some success in containment within Q2 2020 and a gradual relaxation of restrictions, enabling most economies to begin a gradual recovery in Q3 2020.
-- The moderate scenario primarily considers two economic measures: declining GDP growth and increased unemployment levels. For asset classes where consumer-based obligors are the source of cash flows to repay the rated transaction, the unemployment rate generally provides the basis for measuring performance expectations.
-- To account for the potential additional consumer stress, DBRS Morningstar applied stresses consistent with the moderate scenario in its analysis of the transaction portfolio’s probability of delinquencies.
-- Recently proposed legislation from the California State Assembly, AB 2501, as currently drafted provides Californians with the right to request a forbearance period on certain consumer payments, including property assessed clean energy (PACE) assessments for a period of one year. Letters of opposition have been sent by several industry participants asking for the removal of PACE assessments from this bill. While the bill is in the early stages and could be amended, if passed in its current form, the one-year forbearance period may trigger liquidity issues for notes that require timely payment of interest.
-- Transaction capital structure, proposed 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 ratings address the payment of ultimate interest on a semiannual basis and the payment of principal by the Scheduled Maturity.
-- The capabilities of PACE Funding Group, LLC (PACEfunding or the Company) with regard to originations and underwriting.
-- DBRS Morningstar performed an operational risk review of PACEfunding and considers the Company to be an acceptable originator of 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 Depositor, 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.
-- The Western Riverside Council of Governments, California Statewide Communities Development Authority, and 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.
-- 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.
-- 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.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is Rating U.S. Property Assessed Clean Energy (PACE) Securitizations (July 31, 2019), which can be found on dbrsmorningstar.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.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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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