Third-party financing companies (Sociétés de Tiers-Financement – STFs) have a special legislative status that defines them as ” high-performance energy renovation assemblers “. To this end, STFs can leverage financing tailored to renovation projects, as they benefit from an exception to the prohibition on offering loans outside the banking sector, under the conditions specified by the Monetary and Financial Code. This ability to finance work directly distinguishes STFs from other renovation contractors.

STFs aim at maximizing energy savings by assessing households’ ability to repay the investment based on their available income and energy savings and proposing fixed repayments from the time the work is completed. This makes it easier for households to opt for ambitious renovation projects.

In 2022, thanks to the ORFEE project, the STFs set up SERAFIN association. One of its objectives was to structure a shared resource platform and explore financial mechanisms that would help consolidate a comprehensive and efficient renovation of individual homes and multi-family buildings throughout France.

At first, the idea was to prepare and negotiate the sale of energy-efficient renovation loans, granted to residential homeowners with low and/or middle income, to institutional investors. STFs would obtain liquidity and improve their ability to offer loans tailored to renovation projects.

While STFs have been able to back their direct loans with long-term financing lines, mainly provided by the European Investment Bank (EIB), they need to be prepared to diversify their sources of financing. They also need to decouple the growth of their business from that of their balance sheet size, as a result of accumulating direct loan outstandings.

However, this process requires specific characteristics to be met, which were not in the case of STFs in France.

The potential of loan securitization for energy-efficient renovations

Mobilizing private capital has become an urgent necessity to address the energy transition in Europe and achieve zero emissions by 2050, especially with regard to the building sector, the largest emitter of greenhouse gases. In most cases, this task requires the use of procedures that ultimately must be appealing to all involved stakeholders – financial institutions, investors, private companies, public administrations, and homeowners.

Securitization is the process of bundling loans and converting them into negotiable securities that can be sold to investors. This is done to free up capital and enable financial institutions to continue granting loans. In recent years, financial institutions started to offer loans to homeowners for improvements related to energy efficiency, such as the change of windows, insulation of roofs and facades, or the upgrading of heating and cooling systems. These types of loans also can be bundled and sold as securities in the capital market through securitization.

This approach can yield multiple benefits, not only by providing financial institutions with the ability to obtain immediate liquidity but also by enabling them to diversify risks and facilitating access to financing for sustainable energy projects for new homeowners. By selling bundled loans to institutional investors, originating entities can replenish their funding reserves, paving the way for the continued issuance of loans for energy-efficient home improvements. This cyclical process ensures a sustainable flow of capital, driving ongoing progress in the realm of green living.

The securitization process is a meticulous journey that involves various stakeholders. Originating entities play a central role in preparing and packaging loans for institutional sale. It is not merely a financial transaction; it is a strategic manoeuvre to make environmental improvements financially feasible.

Investors are enticed by the prospect of contributing to sustainable initiatives while reaping financial rewards, increasingly mindful of the environmental impact of their portfolios, and seeking opportunities that align with sustainability goals and environmental, social, and governance factors (ESG). The purchase of these securities provides them with another avenue to incorporate ESG criteria into their portfolios. In the evolving landscape of financial markets, ESG criteria have solidified their presence, becoming a lasting element. Investors on a global scale now recognize the value of infusing sustainability and responsible decision-making into their investment frameworks. Although ESG securitization initially lagged behind other facets of ESG finance, it has gained significant traction in recent years, marking a notable shift in momentum.

While the potential benefits of loan securitization for energy-efficient renovations are substantial, the path to success is riddled with challenges. Achieving success in this domain requires overcoming hurdles and refining strategies.

Third-party financing companies testing the securitization: conditions for achieving financial viability

The ORFEE project has made it possible to examine the conditions that need to be in place for STFs to consider transferring receivables following the energy consumption monitoring phase after renovation works are achieved.

The first condition, which has not yet been met, under the current set-up and business strategies of the STFs, is to have a robust data collection and management plan to enable securitization structuring teams to make the most of loan data. Indeed, third-party-financing companies are all aligned on the same credit-granting method, but beyond this essential point, they have not made it a priority to agree on uniform loan management procedures and tools.

Thus, STFs are not prepared yet to face investors’ requirements: a solid and proper data collection and management plan is not yet in place, and procedures are not standardized.

The second condition is to achieve the volumes expected by investors. The survey carried out by GNE Finance shows that the threshold is around 500 million euros, which STFs won’t reach before 2024-2025, provided they can pool their loan portfolios.

These initial findings, based on in-depth discussions between Hauts-de-France Pass Rénovation, GNE Finance and Energies Demain, have demonstrated the importance for STFs to present their loan portfolios in a homogeneous way. This has led to the design of a database of third-party financing companies, making it possible to cross-reference data on buildings, works and financing carried out.

Third-party financing companies’ priority: distributing government-regulated zero-rate eco-loans

The primary objective of STFs is to provide homeowners with the best possible loan conditions, in terms of interest rates and repayment terms. On the French market, state-regulated zero-interest loans clearly represent the best offer.

This regulated product is also attractive to lenders because it includes a fairly high fixed margin: 1% for individual loans and 2.2% for group loans to condominiums.

The SERAFIN association’s number-one objective was therefore to step up their dialogue with the ministerial departments in order to be authorized to distribute the regulated zero-rate loan (eco-PTZ).

As a reminder, the eco-PTZ scheme, as described in the French tax code, had a restricted definition of approved lenders as banking establishments, which prevented third-party financing companies from entering the scheme. The zero-rate loan was gradually opened up to third-party financing companies: an experiment was authorized in 2 regions (Ile-de-France and Hauts-de-France) between 2020 and 2023, and following a positive report from the French administration, the legislative and regulatory framework for eco-PTZs was completely opened up to STFs in the 2024Finance Act.

The impact of eco-PTZ on the appetite of financial investors in STFs’ securitized loans

The operational management of these regulated loans is quite specific, as they include a tax credit mechanism benefiting the lenders, to compensate for the absence of interest received from the borrowers. It involves other specificities such as reporting to a national management company (‘la Société de Gestion du Fonds de Garantie à l’Accession Sociale’) which makes them more complex to manage than standard loans.

However, investors are generally reluctant to adopt particularities in the management of loan portfolios, as these are detrimental to the liquidity of these financial assets. Consequently, we anticipate that, even when the SERAFIN network achieves sufficient volumes and a satisfactory level of loan management and standardized data production, it will be confronted by financial investors offering unattractive purchase terms for these “esoteric” loans.

Looking for alternative solutions to securitisation

Having navigated through the challenges of loan securitization, we now turn our attention to alternative strategies when securitization proves unattainable. One of them involves establishing different types of strategic alliances with partners who can contribute capital, resources, and technical assistance without the need for resorting to securitization.

SERAFIN association members’ second objective is to build prescription relations with banks. In order to adhere to their original mission of promoting the energy-efficient refurbishment of residential housing, STFs have proposed partnerships with several banking networks. They aim to direct the clients of these banks toward their offer of technical assistance for efficient renovations.

The implementation of these partnerships is currently being sought at the level of each STF.

The objective of standardizing the STFs to present their debt portfolios uniformly via a common database on buildings, renovation works and financing carried out is also necessary in order to strengthen links with banks, who are willing to apply these files in the same way throughout France.

To support SERAFIN in its business plan roll-out, the ORFEE project is also focusing its efforts on strengthening:

  1. IT Infrastructure: The purpose of such a structure is to enable the STFs to run regular reports on their loan portfolio’s main characteristics (such as credit risk, geography, environmental impact, etc.), monitor a borrower’s payment behaviour, and present historical data analysis related to prepayments (either full or partial) and delinquent, defaulted, and recovered payments on each STF level.
  2. Standardization of Operations: SERAFIN is promoting standardized operations for all STFs, covering aspects from marketing strategy, credit risk analysis, loan documentation, ongoing loan servicing (including quality control of efficiency of technologies installed), to the project database, etc., specifically tailored for energy-efficient refurbishment projects.

A solution that solves difficulties faced by third-party financing companies and meets the needs expressed by banks

The momentum generated by the ORFEE project and the creation of the SERAFIN network has led to FIDEO – Banque de la Rénovation Energétique project, which aims to create a financing company specializing in the renovation of private housing, capitalizing on the experience of third-party financing companies and the quality and compliance framework for support and work completion defined by the SERAFIN network.

SERAFIN network members need a relay if they are to continue distributing renovation loans. On the one hand, active third-party financing companies needed to find an alternative to securitization in order to avoid excessive balance sheet growth, streamline their systems and limit processing costs. On the other hand, to encourage the development of the network, new operators must be given the choice of avoiding the burden of managing direct loans.

At present, the contribution made by banks does not correspond to market needs. Banks face many obstacles, resulting in costs and risks that make this market unprofitable in terms of return on allocated equity. These include technical and administrative complexities, compliance risk, high counterparty risk, and unsuitable IT systems. However, banks are keen to finance this market, which they see as having multiple virtues: the production of “green” loans likely to improve their Green Asset Ratio, but also to highlight their social role and meet their customers’ ever-increasing expectations in terms of support for the ecological transition, and so on.

Several banks have expressed interest in the idea of setting up a marketplace financial institution specializing in energy-efficient renovation: a “missing link” that draws on STF’s unique expertise in energy-efficient renovation, including technical, regulatory and psycho-social aspects, to facilitate access for all households to tailored loans integrated into the assistance pathway to renovation works.

The FIDEO – Banque de la Rénovation Energétique project was therefore submitted to the France 2030 Call for Projects in November 2023, and the results are expected early in the 2nd quarter of 2024…

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