This week, pay-as-you-go solar firm BBOXX said it plans to lead the first-ever securitization of off-grid assets. The plan is to lower its cost of capital as it scales in developing countries.
Despite improvements in business and financial model innovation in off-grid deployment, investment has been painstakingly slow to materialize. That's because the enterprises working in developing countries face a trifecta of risk: impoverished customers, emerging markets and new technology models.
In order to solve this problem, BBOXX -- and other similar companies -- need to prove their case. Accurate information (i.e., credit analytics) demonstrates to risk-averse investors that customers will pay for their solar electricity in a predictable fashion that will generate financial returns for investors.
Data is something this industry is particularly well-suited to provide. Many of the leading companies providing solar to off-grid households and businesses rely on sophisticated pay-as-you-go technologies that leverage mobile money and communications platforms. Both platforms generate enormous amounts of data, which, if properly compiled and analyzed, can help financial institutions deal with risk.
BBOXX is using the 12 years of data it has collected to structure asset-backed notes that it plans to sell to investors. The notes -- called Distributed Energy Asset Receivables, or DEARs -- represent a bundle of customer contracts, with an average net present value of $300.
BBOXX transfers this $300 contract to a special purpose vehicle (SPV) and collects a payment of $210 in return. If BBOXX's installed cost per system is less than $210, it will have immediately recovered all of its costs and some of its profit.
The DEARs pool of securitized assets consists of 2,400 customers with a low likelihood of default, based primarily on repayment history. Going forward, BBOXX will apply more sophisticated data analysis to de-risk these small pools of assets.
The DEARs structure convinced Dutch-based investor Oikocredit to buy the first issuance for a total value of 52 million Kenyan shillings ($508,000). BBOXX plans a second placement for March of 2016 worth 250 million Kenyan shillings (~$2.4 million).
The second DEARs transaction will be rated by a Kenyan registered credit rating agency. BBOXX, Oikocredit and financial advisor Persistent Energy Capital created this structure as a scalable funding tool for BBOXX. The company is aiming to finance the equivalent of $16 million in 2016, both in dollars and local African currencies.
"This is the only financial structure that can scale to billions," said Mansoor Hamayun, CEO of BBOXX. "The fact that we can securitize the credit risk of the unbanked and, very soon, get rated, has us very excited. We now have a methodology to bring solar electricity to off-grid customers at a larger scale."
This financial inclusion is what makes distributed solar energy an incredibly powerful development tool -- one many in the financial inclusion community are only now beginning to recognize.
"We are thrilled to have helped put this tool of modern global markets to work to finance off-grid solar energy companies. We believe that DEARs will bring in new global and local institutional investors as DEARs note financiers and that this will propel the growth of these companies to reach the millions of customers who want affordable clean energy that can bring them the modern services of lights, TVs, radios, refrigerators and much, much more," said Chris Aidun, the CEO of Persistent Energy Capital.
Justin Guay is a program officer at the Packard Foundation working on energy and climate issues.