Bright outlook accompanies Sunnova's 2nd term ABS
Sunnova Energy in Houston plans to issue $158 million in asset-backed securities (ABS), its second term ABS securitization that relies on investors trusting its solar-loan-origination acumen, rather than its loan history.
Led by Credit Suisse, Sunnova Helios IV Issuer, LLC is split between $136 million in Class A bonds carrying a coupon of 2.98%, and $22 million in Class B bonds with a rate of 7.25%. Each tranche matures in June 20, 2047, according to Kroll Bond Rating Agency's (KBRA) June 19 pre-sale report.
The agency gives an A-minus rating to the Class A bonds, which provide initial credit enhancement of 27.21%, and a BB-minus rating to the Class B bonds, carrying credit enhancement of 14.71%.
KBRA notes in the report that Sunnova has a limited operating history for its originations, servicing and underwriting criteria used to originate the solar loans held as collateral. The company, which raised $162.3 million in an initial public offering in July 2019, began originating solar loans in 2015, providing the rating agency with no more than five years of performance data on loans that typically have 25-year terms.
"These solar loans have not been through a full life cycle," KBRA says, adding, "Given its limited historical performance data, Sunnova commissioned a major credit bureau to conduct a proprietary study of 'home related' unsecured loans for loans that closely resemble residential solar project loans."
KBRA says it used the "gross default data" to derive a loss timing curve and gross default assumptions and then compared those results to other consumer loan defaults by similar borrowers. Most of the borrowers in the securitization are prime credit-quality homeowners, with a weighted average original FICO score of 737.
Sunnova will use net proceeds from the Class A notes to repay a portion of one or more existing financing arrangements. In May, Sunnova closed a private placement of convertible debt for up to $190 million as well as a privately negotiated exchange of $55 million. The company has experienced net operating losses since inception, but its adjusted EBITDA has been positive since 2016.
Solar-finance ABS was anticipated to shine in 2020 in light of California's push for more solar-powered homes, mounting investor enthusiasm and the potential extension of an important federal tax credit (SEE ASR, June 3, 2019). KBRA notes COVID-19 impact on consumer loans, prompting it to increase its base-case default assumptions in the Sunnova deal.
Despite challenges, the issuer retains a bright outlook. KBRA says that in May, the company reaffirmed its full-year 2020 guidance despite recent public health and economic challenges.