DBRS Morningstar Finalizes Provisional Ratings on HERO Funding 2021-1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following notes issued by HERO Funding 2021-1 (the Issuer):

-- $52,850,000 Class A Notes rated AAA (sf)
-- $10,450,000 Class B Notes rated BBB (sf)

The ratings are based on DBRS Morningstar’s review of the following analytical considerations:
-- Coronavirus Disease (COVID-19). The analysis incorporated the impact of the coronavirus as follows:
-- The transaction assumptions consider DBRS Morningstar’s set of macroeconomic scenarios for select
economies related to the Coronavirus Disease (COVID-19) available in its commentary Global Macroeconomic Scenarios: March 2021 Update, published on March 17, 2021. DBRS Morningstar initially published macroeconomic scenarios on April 16, 2020, which have been regularly updated. The scenarios were last updated on March 17, 2021, and are reflected in DBRS Morningstar's rating analysis.
-- The assumptions consider the moderate macroeconomic scenario outlined in the commentary, with the moderate scenario serving as the primary anchor for current ratings. The moderate scenario factors in increasing success in containment during the first half of 2021, enabling the continued relaxation of Restrictions. To account for the potential additional borrower stress, DBRS Morningstar applied adjustments consistent with the moderate scenario in its analysis of the transaction portfolio’s probability of delinquencies.
-- 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. DBRS Morningstar analysis takes into account the historical performance statistics of each Property Assessed Clean Energy (PACE) Program. For this transaction, the rating addresses the payment of timely interest on a semiannual basis and the payment of principal by the Scheduled Maturity.
-- DBRS Morningstar performed an operational risk review of Kawa Capital Partners (Kawa or the Company) and considers the Company to be an acceptable sponsor of the Transaction.
-- 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 Los Angeles County 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 a 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 be brought to validate PACE programs in the state. The Missouri PACE legislation contains another provision, known as a the statute of repose, which requires challenges to PACE programs to be brought within a limited period of time. Similar to a validation proceeding, the effect of the statute of repose is to bar 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 MCED PACE program and 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.
-- 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 the 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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 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.

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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