Pricing of Tax Credit Transfers: A Closer Look

The slide on the pricing of tax credit transfers in the October 29 blog post prompted several questions from readers. In response, we took a closer look at the underlying data. We focused on deals with both tax credit insurance and an indemnity (or a guaranty of an indemnity) from an investment grade (“IG”) party.

The table below reflects that review, under which two agreements are now classified differently. It also breaks the data out by year and shows the number of agreements in each category.

What the numbers show

• IG indemnity alone vs. IG indemnity plus insurance: Pricing remains slightly higher for an IG indemnity without insurance than for an IG indemnity combined with insurance.
• IG indemnity plus insurance vs. insurance alone: In each year with more than one agreement that has both an IG indemnity and insurance, those deals priced slightly higher than deals with insurance alone.

Why might adding insurance correspond to lower pricing?

Readers have asked why deals with both an IG indemnity and insurance price lower than deals with an IG indemnity alone. Two factors may help explain it:

• Indemnity terms are not captured in the data. The numbers don’t account for how the indemnity is worded or structured. In deals that pair an IG indemnity with insurance, the dollar cap on the indemnity (or guaranty) may be lower, the claim period shorter, or the scope narrower.

• Some IG indemnities come from banks. Some IG-indemnity deals without insurance involve selling tax credits that would otherwise be allocated to a bank acting as a tax equity investor. Often the bank itself gives the indemnity. Some buyers will pay a premium for a bank indemnity for at least two reasons:

  1. The bank usually keeps part of the credits, and under the transfer regulations, if the IRS finds a problem, the retained credits are reduced first.
  2. Some banks have a reputation for expertise in tax credit structuring and diligence, and buyers may be willing to pay a premium for that.

 *With only one data point, this metric is not meaningful for comparison or trend analysis.