Sunnova’s credit rating downgraded by Fitch due to missed interest payment

Investing.com -- Fitch Ratings has lowered the Long-Term Issuer Default Ratings (IDRs) of Sunnova Energy International Inc (NYSE:NOVA). and Sunnova Energy Corporation to ’C’ from ’CCC-’, following Sunnova’s decision to not pay a $23.5 million interest on its $400 million senior notes due 2028. The agency also downgraded the senior unsecured debt of Sunnova Energy Corporation to ’C’ with a Recovery Rating of ’RR4’ from ’CCC-’/’RR4’.

The downgrade was prompted by the start of a 30-day grace period after Sunnova chose not to make the scheduled interest payment on April 1, 2025. This decision comes amidst significant refinancing risk and ongoing weak cash flows. If Sunnova fails to make the interest payment within this grace period or if a debt restructuring that constitutes a distressed debt exchange (DDE) under Fitch’s rating definitions occurs, the IDR could be further downgraded to ’RD’ (Restricted Default).

Sunnova’s ratings also take into account the structural subordination of its corporate debt to nonrecourse securitization debt, which is a primary source of funding for the company.

Sunnova had chosen not to make the interest payment in an attempt to improve financial flexibility as it works with stakeholders to reduce debt, as per an 8K filing from April 1, 2025. Fitch believes that Sunnova is likely to face difficulties in refinancing its $400 million senior unsecured bonds and $575 million convertible bonds, which mature in September and December 2026 respectively. The company’s liquidity remains weak with only $34.7 million available for corporate use as of Dec. 31, 2024, and cash flows are expected to remain under pressure.

Earlier in March, Sunnova issued a $185 million term loan with a 15% interest rate, using residual equity interests in all its securitizations, excluding those of the Hestia and RAYS programs, as security. The proceeds from this term loan will be used to manage its working capital. However, this move increases Sunnova’s already high consolidated leverage, limits future capital market access, and subordinates the existing corporate debt.

Sunnova’s senior unsecured debt, issued by SEC, is subordinated to nonrecourse securitization debt. Most of the company’s revenue services securitizations and tax equity obligations, with the residual available for debt service and operating expenses.

Sunnova’s main concern at the holding company level is the securitization refinancing risk at the anticipated repayment date (ARD), typically five to 10 years after issuance. The next ARD is in 2027, providing some runway. However, the main risk would be whether Sunnova can secure capital market access, especially in the current high-interest-rate environment.

There is a parent-subsidiary linkage between Sunnova and SEC. Fitch determines Sunnova’s standalone profile based on consolidated metrics. SEC has a stronger standalone profile than its parent Sunnova due to additional debt at the Sunnova level.

Sunnova’s ’C’ IDR reflects the company’s entry into a 30-day grace period following the non-payment of its April 1, 2025 interest obligation on one of its senior unsecured notes. Sunnova’s ongoing credit profile is characterized by metrics that are materially weaker than those of its peers, with historically negative CFO. Additionally, it has a materially weaker liquidity position and high refinancing risk.

The ’C’/’RR4’ rating, where ’RR4’ denotes a 31%-50% recovery for Sunnova’s senior unsecured notes in a bankruptcy case, is based on a scenario in which Sunnova is not able to cure its missed interest payment within the 30-day grace period.

Factors that could lead to further negative rating action or downgrade include inability to cure the missed interest payment within the allowed grace period, a debt restructuring that is considered as a DDE, or initiation of a formal bankruptcy procedure. On the other hand, payment of due interest before expiration of the 30-day grace period could lead to a positive rating action or upgrade.

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