Investing.com -- Moody’s Ratings has downgraded Sunnova Energy International Inc (NYSE:NOVA).’s corporate family rating (CFR) and probability of default rating to Ca from B3. The rating for Sunnova Energy Corporation’s senior unsecured notes was also downgraded to Ca from B2. The downgrades affect approximately $800 million of debt securities. Sunnova’s Speculative Grade Liquidity (SGL) rating was also lowered to SGL-4 from SGL-3. Despite these changes, the outlooks for both Sunnova and Sunnova Energy Corporation remain stable.
The downgrades come as Sunnova faces an increased likelihood of default as it approaches debt maturities of $975 million in 2026. The company is grappling with a high cost of capital, pressure on working capital, and adverse market conditions in the renewable energy and tax equity sectors, areas where it is heavily reliant. These issues have been exacerbated by the going concern opinion included in Sunnova’s 10-K filing earlier this month, which has heightened uncertainty over the company’s future.
Sunnova secured a $185 million high-interest rate term loan in early March to maintain liquidity. However, Moody’s believes a near-term debt restructuring is likely due to widespread concerns about the company’s financial viability, which could impact its ability to operate effectively.
The rooftop solar industry, in which Sunnova operates, has been under pressure in recent years. Although distributed generation companies benefited from higher utility tariffs in 2022 and 2023, they are now facing a higher cost of capital for their financings. State-level reductions in net metering incentives have led to lower solar export credits for distributed generators. Political uncertainty surrounding potential revisions to tax credit policies and a more negative sentiment towards the renewable energy sector have also undermined investor confidence.
Environmental, Social, and Governance (ESG) considerations played a key role in this rating action. Sunnova’s governance score was lowered to G-5 from G-3, and its credit impact score to CIS-5 from CIS-3. The lower governance score reflects the company’s high leverage, management turnover, and the increasing likelihood of a distressed exchange or other type of restructuring as it faces significant upcoming debt maturities.
Sunnova’s downgrade in its speculative grade liquidity rating to SGL-4 from SGL-3 is reflective of its weaker liquidity position. The company’s unrestricted cash balance at the end of 2024 was $211.2 million, but $176.5 million of this was paid into collections account by collateralized assets under non-recourse financing arrangements, leaving only $34.7 million available for other purposes.
While the $185 million term loan has temporarily improved liquidity, the company’s need for working capital is expected to increase substantially. This is due to asset-based lenders, local dealers, and tax equity investors requiring more security and assurances to engage with Sunnova, given the going concern opinion and the higher prospects of a distressed exchange or other type of restructuring.
Sunnova’s rating could be upgraded if the company is able to address its 2026 debt maturities without resorting to a distressed exchange or other type of restructuring, or if the recovery prospects for its senior notes improve. Conversely, a downgrade could occur if the level of recovery on the senior notes significantly diminishes.
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