KBRA Maintains Watch Developing Placement on SunStrong 2018-1 Issuer, LLC
18 Jun 2024 | New York
KBRA maintains its Watch Developing Placement on the Class A Notes of SunStrong 2018-1 Issuer, LLC (SunStrong 2018-1 or Issuer), a residential solar lease transaction. The rating was initially placed on Watch Developing on December 21, 2023 due to the financial health of SunPower Corporation (SunPower or the Company) who serves as sub-manager. The manager of the transaction, SunStrong Capital Holdings, LLC (SunStrong), was formed in 2018 and is jointly owned 51% directly by SunPower and 49% indirectly by HannonArmstrong. According to a December 18, 2023 10-K/A issued by SunPower, the Company breached a covenant in their credit agreement due to a delay in filing their 10-Q caused by them identifying a material weaknesses in their internal controls over financial reporting. As a result, creditors at that time could have demanded immediate repayment of amounts owed under their credit facilities. In connection with this, and also reported in the 10-K/A on December 18, 2023, SunPower stated that substantial doubt exists about their ability to continue as a going concern. If SunPower were to file for bankruptcy it could cause a manager termination event and have a negative impact on the transaction’s performance.
On February 23, 2024, SunPower announced it secured over $300 million in project financing commitments for its residential solar and storage lease programs, which will be paid upon installation. In addition, on February 14, 2024, SunPower announced it had raised $175 million of capital financing through a second lien term loan from SunPower’s majority shareholder.On June 3, 2024 SunPower announced they had drawn the remaining $50 million second tranche of the term loan. As a result of drawing the second tranche, SunPower issued warrants to the lender to purchase up to approximately 33.4 million shares at an exercise price of $0.01 per share. The Company also obtained waivers from its financial partners and entered into an amendment to its revolving corporate debt facility to provide access to incremental $25 million in previously undrawn capacity under the facility. Those waivers may need to be extended if they are unable to file a restated 10-K by June 30, 2024. The Watch Placement will continue to be maintained as KBRA considers additional information, including the pending release of SunPower’s 10-K, the expiration of its current debt waivers, and any financing agreements needed to continue operations.
The table below displays the current capital structure.
Sunstrong, as manager, is responsible for providing all administrative, collection and other management services for the Issuer and in respect of the managing members. SunStrong, although obligated to ensure all services are performed, has delegated substantially all of its responsibilities to SunPower Services, an indirect wholly owned subsidiary of SunPower, as sub-manager. In the event that SunPower Services is terminated, the delegation of the manager obligations will also terminate, provided that, no such termination will be effective unless a replacement sub-manager has been appointed which per the management agreement may be Hannon Armstrong Capital, LLC, a subsidiary of Hannon Armstrong.
The transaction includes GreatAmerica Portfolio Services Group LLC (GreatAmerica) as transition manager who will assist in the transition to a replacement manager if there is a manager termination event. Manager termination events per the transaction documents include, but not limited to:
- certain events of bankruptcy, insolvency, receivership or reorganization of the manager or the sub-manager; or
- the manager or the sub-manager ceases to be engaged in the business of monitoring or maintaining assets of a type comparable to the solar assets.
KBRA will continue to monitor the developments and implications of SunPower’s financial health, as well as possible manager transitions and performance of the SunStrong 2018-1 transaction.
To access rating and relevant documents, click here.