Sunnova: Too Close to the Sun

Welcome to the 186th Pari Passu newsletter.

Over the last three weeks, we analyzed FXI, Rinchem, and RSA Security (read them here), three LMEs that have shaped the landscape over the past few months. And while the world of restructuring is increasingly associated with LMEs, it’s time to get back to where restructurings are ultimately resolved: Chapter 11.

In today's case, we are looking at Sunnova, one of the largest providers of residential solar energy systems in the United States. The company built a nationwide platform by installing more than 430,000 residential solar power systems by 2025. It enabled more than 441,000 customers to access solar energy through long-term solar leases, power purchase agreements, and loans, all designed to make solar energy accessible with little to no upfront cost. 

However, behind making these systems accessible sat a highly engineered capital structure, in which Sunnova layered securitizations, tax equity partnerships, and corporate-level unsecured debt to fund the high upfront costs of solar system installations. Sunnova’s dependence on outside capital eventually became a major issue after a period of aggressive growth, as rising interest rates made securitization more expensive and growing uncertainty around renewable energy incentives dried up tax equity partnership funding. The company was eventually caught in a snowball effect caused by liquidity strain, resulting in large unpaid balances to dealers and the eventual halt of all its operations, leading to a Chapter 11 filing on June 8th, 2025. 

In this write-up, we will take a detailed dive into Sunnova’s business and the financing structure that enabled its growth. We will specifically analyze how securitization works and how it enabled the company to unlock immediate capital, allowing it to continue growing. We will then explain how this dependence on third-party capital became the company’s primary cause of collapse when the regulatory environment changed. We will then turn to Chapter 11 process and how a group of four distressed investing funds used a classic loan-to-own playbook, racking up huge positions in the capital structure before filing and using those positions to provide a DIP that was eventually used to credit-bid for the company’s assets. 

With that said, let’s dive in!

Sunnova is one of the leading solar energy companies focused on making clean energy more accessible to homeowners. The company provides planning, installation, and maintenance of solar panels and energy systems through a network of dealers across the United States. Customers can access Sunnova’s systems through several long-term contract structures, including solar leases, power purchase agreements (PPAs), and solar loans, each of which provides affordable access to solar energy with little upfront cost. Customers are also able to purchase these systems in cash. By the end of 2024, the company served more than 441,000 customers across 50 states [2]. 

The company was founded in 2012 in Houston by John Berger, an experienced founder within the energy space. The company sought to capitalize on the growing hype around ESG and renewable energy that began in the 2010s. Solar energy was seen as one of the best alternative energy sources due to rapidly declining installation costs, expanding government incentives such as investment tax credits, and the growing desire among homeowners to reduce their dependence on increasingly expensive and unreliable utility-based electricity. 

Investment tax credits allowed homeowners who took on solar loans (essentially mortgages) or purchased solar systems in cash to claim a 30% tax credit to directly offset their federal tax liability. For solar leases and power purchase agreements (PPAs), the company that provides the panels, such as Sunnova, receives the tax credit. We will dive into all of these structures later, but for now, understand that both buying and leasing these solar panels created benefits for both the customer and the company due to the incentives. 

The company received more than $2.5bn in private investments, including tax equity, corporate debt, and equity, from 2012 to 2019, highlighting how capital-intensive the business was relative to its revenue, which reached $132mm in 2019. In that same year, the company went public on the New York Stock Exchange at an enterprise value of around $2.5bn and a market cap of $1bn. The shares were initially sold for $12 and traded under the ticker “NOVA”.

After completing its IPO, Sunnova entered a period of explosive growth, more than quadrupling its customer base from 105,400 to 441,200 between 2020 and 2024, while revenues surged from $161mm to nearly $840mm over the same period [1]. The growth was fueled by the continuing increase in demand for solar energy systems as well as the acquisition of SunStreet for $218mm in stock in April 2021. SunStreet was a subsidiary of Lennar, a publicly traded US homebuilder, that designed and installed solar energy systems on newly built homes. 

Now that we have briefly discussed the company’s history, let’s examine in detail what the company actually does. Sunnova provided the three main types of systems: Solar Energy System, Combined System, and Standalone Energy System. We will collectively refer to these systems as just “solar systems.” Below, we explain each.

A Solar Energy System is what everyone knows and sees; it’s a solar panel system fixed on a home's roof, converting sunlight into electricity to power household appliances and other electrical systems. We typically just notice the panels on the roofs, but if we get more technical, the solar energy system consists of solar photovoltaic panels, inverters that convert direct current produced by the panels into alternating current used by appliances, and a remote monitoring system that measures and monitors the energy produced [1]. This system produces energy when the sun is active, which is either used immediately by the household or fed back into the grid. 

Then, Sunnova also provides a Combined System, which is essentially a solar panel system we just described with the addition of a battery, which enables greater efficiency and flexibility. The battery allows excess energy to be stored and used later, which is beneficial for households subject to time-based utility rates, rolling blackouts, or power outages [1]. For context, some utilities charge time-of-use (TOU) rates, meaning the price of electricity varies by time of day. Rates are higher during designated peak hours and lower during off-peak hours. A battery would allow the house to store excess energy produced during off-peak hours and use it during peak hours or blackouts, providing both economic and reliability benefits. 

Finally, a Standalone Energy System is not a solar panel but rather just a battery wired to a household’s electrical system that charges and stores energy from the electric grid. The battery allows households to store this energy and use it during blackouts and protects them against TOU rates [1]. 

Unlike many other companies in the space, Sunnova employs an indirect dealer network that sells designs and installs these systems onto customers’ homes. The company has relationships with more than 450 dealers, of which the top 12 account for 80% of sales. The dealer model offers higher flexibility in entering and exiting certain markets and reduces fixed costs compared to a vertically integrated model.  The dealers follow Sunnova’s standards and originate customers, design and install systems, ensure quality, and maintain these systems. 

In a typical process, when a customer plans to get a solar system, they contact a Sunnova dealer in their area, who they find through the Sunnova website or other sources. The dealer then meets with the customer, inspects their home, and designs a solar system tailored to the customer’s needs and preferences. The dealer then sends the system design to Sunnova for approval. Once approved, the customer signs a contract, and the dealer orders the system components from approved suppliers and later begins the installation process. In return, Sunnova pays its dealers in two milestone-based payments: first upon the notice to proceed, when Sunnova issues its formal installation approval, and second at final completion, when the dealer has finished installing and commissioning the system. In total, Sunnova covers the dealers' design and installation costs and pays them an additional margin. Once the system is installed, customers pay Sunnova directly, depending on the contract type they selected, which we will discuss later.

The solar energy systems that Sunnova's dealers install are sized to meet typical household energy needs. A typical residential solar system has a capacity ranging from 6 kW to 8 kW, which is how much power the system can produce in a given moment, and requires approximately 350-450 square feet of space for the panels. A typical U.S. household consumes between 600 and 1,000 kWh of electricity per month. A 7 kW solar system can produce roughly 700–900 kWh per month, meaning it can fully cover the household’s energy needs under favorable weather conditions, particularly when paired with a battery.

Not surprisingly, these systems can cost a lot of money depending on their output capacity. A typical 7 kWh panel system can cost between $20,000 to $25,000, making it a substantial sum for most customers to pay in cash [10]. If the system also has a battery, the price tag increases by about $10,000, bringing the total to ~$30,000. As a result, Sunnova and other companies employ a range of long-term contract structures, including leases, loans, or power purchase agreements (PPA). In each case, Sunnova installs the systems, after which the company either owns them (under a PPA or lease agreement) or transfers ownership to the customer and provides a solar loan (under a loan agreement). Let's break down each of these agreement types.

In a Solar Lease agreement, Sunnova installs a solar system on customers' homes at no upfront cost, retains ownership of the system, and collects fixed monthly lease payments from customers as revenue. These payments are fixed and do not change with the amount of power the household consumes. Under this structure, the customer hopes to save money by relying on the solar system to generate energy and paying less to Sunnova than they would pay their local utility. Leases usually include performance guarantees under which Sunnova will refund customers or provide credit if the Solar Systems don’t produce the minimum required power output. Solar leases generated $239mm of revenue in 2024, accounting for 29% of total revenue and representing the largest source [2]. 

Then, under a Power Purchase Agreement (PPA), Sunnova installs a solar system on a customer’s home at no upfront cost to the customer, after which Sunnova owns the system and collects monthly bills from the customer for the energy produced by the system at an agreed-upon price per kilowatt-hour (kWh). As a result, these monthly payments vary based on how much solar energy the solar systems produced during the month. The rate per kilowatt-hour is usually 10-30%  lower than the local utility price per kilowatt (15-20 cents per kWh), which is the appeal of the PPA agreement. These agreements are good for customers who prefer to pay for performance and don’t mind the variable bills. PPA agreements are also long-term, with initial terms between 20 and 25 years. PPAs generated $176mm in revenue in 2024, accounting for 20.9% of total revenue and representing the second-largest source [2]. 

Finally, a Solar Loan agreement is essentially a solar system mortgage, in which the customer borrows directly from Sunnova to purchase a newly installed solar energy system, then repays the loan plus interest through monthly payments. The loan terms range from 10 to 25 years. This option offers the highest long-term savings potential, as customers who pay off their loan effectively generate free energy for the remainder of the system's life. Additionally, owning the system allows the customer to benefit from the investment tax credit (ITC), which equals 30% of the system cost and can be used to directly offset their federal tax liability. Similar to lease agreements, Sunnova provides a performance guarantee and refunds customers if the system fails to meet the minimum power production [1]. These contracts generate payments to the company in three main ways: interest income, principal repayment, and revenue, which represents payments for operations and maintenance services provided by the company. Solar loans should be viewed more as the financing side of the business, so the principal and interest payments the company receives from customers can be thought of as the yield on its loan book, rather than the revenue. Solar loans generated $48mm of revenue and $150mm of interest income in 2024.

These three agreement types represented Sunnova’s core sources of long-term, recurring revenue and payments. Below is the company’s revenue breakdown.

In addition to long-term contracts, Sunnova allows customers to purchase solar systems in cash, which is reported in the Cash Sales Revenue line. Sunnova groups its revenues by “Customer Agreements & Incentives,” which represent recurring, long-term contracted revenue streams generated by Sunnova's installed portfolio of systems, and “Solar Energy System & Product Revenue,” which represents revenue from one-time sales of solar systems and equipment. In the latter group, Sunnova generates revenue by buying and reselling inventory, like solar panels, to dealers, as reflected in the Inventory Sales Revenue line.  Additionally, Sunnova has a small team that directly sells and installs non-core solutions, such as maintenance services, battery installations, and other supplemental systems, in specific markets; this is reflected in the Direct Sales Revenue line. Finally, other revenue primarily represents proceeds from the sale of Solar Renewable Energy Certificates, which are essentially credits for one megawatt-hour (1000kWh) of electricity generated by a solar energy system. They are mostly sold to utility companies and enable them to comply with minimum solar power generation requirements. 

Now that we know how Sunnova makes solar systems accessible through three main types of long-term agreements (leases, PPAs, and loans), we can discuss the implications for the company. As of 2024, 31% of customers had solar leases, 28% had PPAs, 24% had solar loans, 5% purchased systems in cash, and 12% held independent service agreements, under which Sunnova serviced or financed third-party home improvement systems, like generators or smart home systems [1]. Leases, PPAs, and loans accounted for 83% of customer agreements, for which Sunnova had to fund the upfront cost of the solar systems ($15,000-$30,000 each) and expect to collect payments over 15 to 25 years. This is where we can start discussing the financial engineering Sunnova employed to grow despite the high upfront costs of solar systems. This financing system was a core part of Sunnova’s business, enabling it to grow at such a fast pace. Below is Sunnova's corporate structure, which we will refer to throughout this analysis. 

Sources of Capital

First, let’s briefly define some of the third-party sources of capital that Sunnova used to fund the upfront costs of these solar panel installations. 

Sunnova had two warehouse facilities, the TEPH Warehouse Facility and the SLA Warehouse Facility. These warehouse facilities were asset-backed, revolving lines of credit that allowed Sunnova to fund the initial system installation costs before they could be financed through tax equity partnerships (TEPs) and securitizations, which we will discuss in a moment. The TEPH warehouse facility acted as the company’s bridge facility for originating leases and PPAs, and it was used to purchase the solar power system from the dealer during installation. The SLA Facility served as the company’s bridge financing to originate solar loans. Both of these facilities were in special purpose entities and were non-recourse, meaning they funded assets only within the SPE and were completely separated from the rest of the entities [1]. 

After Sunnova originated the customer agreements, it turned to TEPs and securitizations, which were long-term financing structures that unlocked immediate capital by monetizing asset-level cash flows and enabled Sunnova to repay the warehouse facilities. Let’s transition to how the company monetized its assets and loans and explain how these structures worked. 

In a typical process, when the dealer originates a lease or PPA agreement with the customer, Sunnova borrows against its TEPH warehouse facility to pay the dealer and acquire the system as it's being built. Once Sunnova purchases these in-progress solar systems from the dealer, they are owned by the TEP Developer entity. The TEP Developer entity's balance sheet acts as collateral for the TEPH facility. Once the system is fully built, along with many others, it is transferred to a newly formed tax equity partnership jointly owned by a third-party TEP investor, like a bank or any company that has tax liabilities (through Class A interest), and the Sunnova TEP Holdings entity (through Class B interest) [4]. 

Tax equity partnerships (TEPs) are among the key financing structures enabled by government incentives, specifically the Investment Tax Credit (ITC), which allows up to 30% of the investment in a renewable energy system to be used to offset the tax liability. Because Sunnova doesn’t generate enough taxable income to fully realize these credits, it creates tax equity partnerships with third-party investors,  such as banks, insurance companies, and other companies with significant tax liabilities, who contribute upfront capital to realize the full value of the ITCs.

The TEP has a pre-determined composition of systems and a total fair market value of the assets that it is supposed to hold. Until it reaches that threshold, the TEP remains "open," and finished solar power systems continue to get transferred into it. Usually, a TEP investor’s total commitment is approximately 30-40% of the TEP's total asset value, so it is insufficient to fully repay the TEPH warehouse facility [22]. Historically, Sunnova closed 5-8 TEPs per year, with an average committed capital of ~$150mm for each TEP [2].

Upon the formation of the TEP, the third-party investors contribute approximately 20% of their total committed capital upfront. This initial contribution partially funds the progression of solar systems through to completion and their transfer to the TEP entity [1][4].

After the TEP acquires the predetermined number of systems, all of which have reached final completion, the TEP closes, and the third-party investors contribute the remaining 80% of committed capital, which in total equals ~30-40% of the total TEP asset value. These proceeds are used to partially pay off dealer accounts payable and fund working capital. 

When a TEP is closed, all customer payments on solar leases and PPAs are collected at the TEP level, then flow up to the TEP manager, and are distributed between Sunnova and the TEP investors according to a “partnership flip” structure. To put it simply, until the third-party TEP investor  (Class A interest) receives their minimum required return from the TEP, the investor receives 99% of the investment tax credits (ITCs) and 10-30% of the cash generated by the assets, while Sunnova (Class B interest) receives 70-90% of the cash flows and only 1% of the ITCs. After the investor’s minimum return is met, a flip occurs, after which Sunnova will receive 95% of the cash, and the TEP investor will receive only 5%. The partnership flip structure essentially allows the TEP investor to be repaid with a higher allocation of cash flows (10-30%) while realizing all ITCs. After full repayment, the flip occurs, and Sunnova starts receiving nearly all cash flows. At the time of Sunnova’s filing, all TEPs were “pre-flip.”

Securitization:

When Sunnova installs all pre-determined solar systems and contributes them to the TEP, the TEP closes and begins generating cash flows from customer payments. When that happens, Sunnova establishes a series of special purpose entities (SPEs), which are legally separate entities with their own balance sheets and are bankruptcy-remote, meaning they remain unaffected when the parent company files for bankruptcy. Sunnova then transfers its Class B equity interests in the TEP through a chain of intercompany transactions into an issuer SPE. As mentioned, these interests entitle the holder (the SPE in this case) to receive 70-90% of the cash flows from the TEP assets. To monetize these long-term cash flows, the SPE issues asset-backed notes, often in multiple tranches, secured by the class B interests and serviced by the cash flows. Sunnova owns an equity interest in each of the SPEs, meaning it receives any residual cash flows once all ABS tranches are paid their interest and amortization. The proceeds from the asset-backed notes are distributed back through the intercompany chain to TEP Holdings, which uses them to repay the TEPH Facility, thereby replenishing its borrowing base capacity and enabling Sunnova to resume the origination process [1]. Essentially, the securitization unlocks the remaining capital that TEP investors didn’t fund. 

Below is an illustration of the securitization process to help clarify it. By looking at the illustration, you will notice that the financing system is essentially a cycle. 

To summarize, Sunnova employs a two-stage monetization process in which solar assets are first contributed to TEPs, where tax equity investors provide capital in exchange for ITCs and cash flows, after which Sunnova securitizes its equity interest in the TEPs by issuing asset-backed notes. The proceeds from the notes are used to repay the TEPH facility, thereby allowing the entire origination cycle to restart.

Now that we have discussed the structure for monetizing PPAs and leases, we can turn to solar loans, which essentially constitute solar system mortgages. These present the same issue as PPAs and leases: Sunnova must initially fund the solar system installation and wait for years as the customer repays the loans. To solve this issue, Sunnova employs securitization directly by pooling solar loans and transferring them into an SPE. 

When a dealer signs up a customer for a solar loan and begins installation, Sunnova funds the loan by drawing on its SLA warehouse facility. These loans are held in the EZOP entity and secure the SLA facility. Once Sunnova accumulates a sufficient pool of solar loans, it transfers them to a newly formed SPE. The SPE then issues Loan-Backed Notes, secured by the solar loans and serviced by monthly principal and interest payments. The proceeds from these notes are used to repay the SLA warehouse facility, thereby allowing the entire process to restart. Below is an illustration that recaps what we just described. Sunnova holds equity interests in these SPEs and receives residual cash flows after the SPEs pay out all interest and amortization.

Once assets and loans are contributed to TEPs/SPEs, the company also receives Operations and Maintenance (O&M) fees for maintaining the systems, ensuring performance guarantees are met, and handling billing and collections. This is Sunnova’s core platform, and its function is critical to ensuring that the collateral (solar systems) is in good condition. 

By looking at both financing structures, we see how securitization can help unlock immediate capital from long-dated assets and loans that would take years to generate cash flows. However, it is important to note that this strategy works best when interest rates are low, allowing the company to gain a spread between the long-term contracted cash flows from customers (lease/PPA/loan payments) and the cost of ABS debt.

Overall, there was an inherent timing gap in the financing structure: warehouse facilities bridged the origination phase, but permanent capital through TEPs and securitizations could be deployed only once sufficient assets had been pooled. At any time, the company’s ability to continue operating depended on a timely TEP fund closure and subsequent securitization to prevent cash strain. We will soon discover how this dependence created serious issues down the line as the industry began to experience regulatory changes. 

Below is Sunnova’s capital structure as of the end of 2024.