Fitch downgrades Sunnova’s long-term issuer default ratings

Investing.com -- Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDRs) of Sunnova Energy International Inc (NYSE:NOVA). and Sunnova Energy Corporation (SEC) to ’CCC-’ from ’B-’ on March 6, 2025. The downgrade also includes SEC’s senior unsecured debt rating which has been adjusted to ’CCC-’ with a Recovery Rating of ’RR4’ from ’B’/’RR3’.

The downgrade is due to Fitch’s increased concern over Sunnova’s ability to refinance its corporate maturities due in 2026 and 2028 on reasonable terms. Cash flow generation has not met Fitch’s expectations and residential solar developers are facing challenging operational conditions due to a peer’s bankruptcy and uncertainties regarding renewable asset funding.

Sunnova’s equity and debt instruments have experienced poor capital market performance recently, and the company’s access to new corporate debt is limited. These factors further constrain its options. The company issued a warning about its ability to continue as a going concern in its 10-K filing earlier this week.

The ratings also reflect the structural subordination of corporate debt to nonrecourse securitization debt, which is a primary funding source for Sunnova.

Fitch anticipates a higher probability that Sunnova will be unable to refinance its $400 million senior unsecured bonds and $575 million convertible bonds, due to mature in September and December 2026 respectively, on reasonable terms. As of December 31, 2024, Sunnova had $211.4 million in cash and cash equivalents, but only $34.7 million was available for corporate use.

On March 2, 2025, Sunnova issued a $185 million term loan with a 15% interest rate, secured by pledging residual equity interests in all of Sunnova’s securitizations, excluding those of the Hestia and RAYS programs. The company intends to use the proceeds to manage its working capital. The term loan increases Sunnova’s already high consolidated leverage, restricts any future capital market access, and subordinates the existing corporate debt.

Fitch expects Sunnova’s funds from operations (FFO) coverage metrics and cash flow from operations (CFO) to remain weak over the forecast period, with the consolidated FFO interest coverage ratio persistently low, in the 1.1x-1.2x range through 2026. Fitch believes cash flows could improve from Sunnova’s cost-saving measures, including a 30% headcount reduction since 2023, moderated capex, and efforts to renegotiate dealer terms.

However, Sunnova’s working capital is expected to remain under pressure from timing mismatches between dealer payables and tax equity inflows. Fitch’s calculation of FFO includes principal payments from solar loans customers.

Sunnova’s senior unsecured debt, issued by SEC, is subordinated to nonrecourse securitization debt. Most of Sunnova’s revenue services securitizations and tax equity obligations, with the residual available for debt service and operating expenses. A smaller portion is unencumbered by securitization and flows directly to Sunnova, including revenue from sale of the renewable energy credits, loan and inventory sales, and residual revenue from securitizations. It also receives management and service fees, which are paid before any tax equity and securitization payments.

Sunnova’s closest peers among Fitch-rated renewable energy providers are TerraForm Power (NASDAQ:TERP_old) Operating LLC (TerraForm; BB-/Stable) and Leeward Renewable Energy Operations (Leeward; BB-/Stable), which own and operate portfolios of nonrecourse, predominantly renewable projects.

Sunnova Energy International Inc. is a leading residential energy service provider, serving nearly 441,000 customers across the 50 U.S. states and territories. Sunnova builds, owns, operates and finances residential solar and battery storage assets.

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