Borrowing money

Sunlight Financial: Tough Times (NYSE: SUNL)

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Sunlight Financial Holdings Inc. (NYSE: SUNL), a residential solar POS financing platform, recently withdrew its full-year guidance after accounting for significant impairment charges related to a cash-strapped installer. It should be noted that this announcement comes just after the company’s second quarter missed on another $85 million write-down (related to a failed lender merger). Although management has asserted that the latest writedown was limited to this particular installer, a worrying trend is emerging on the credit front, which, coupled with ongoing Fed rate hikes, could see loan production significantly affected in the future. the coming months.

Nonetheless, SUNL exhibits some redeeming characteristics, including its relatively low exposure to California, which insulates it from the pending Net Energy Measurement (NEM) 3.0 system. changes. Its growing direct lending activity with depository institutions is also expected to contribute to the interest rate impact, although any compensation is likely to be limited for now. Overall, I would hold SUNL stock due to headwinds on platform fee revenue due to the current interest rate environment, as well as future production losses as more installers will be under pressure in the coming months.

Data by Y-Charts

Solar Installer Bankruptcy Leads to Major Depreciation Charge

SUNL’s announced non-cash impairment charge of $30-33 million (~$0.25/share or ~10% of pre-announcement equity value) on advances made to troubled installer liquidity was a bad surprise. More worryingly, this was also a major vendor – the charge is >30% of total advances to Tier 3/Medium Risk vendors based on latest information from SUNL 10-Q Ranking.

The reading is unclear at this point, but given the size of this installer, bank credit was likely involved, which could lead to contagion risks down the line. Although management assured it was an installer-specific issue, this incident follows an increase in loan loss provisions for a single contractor in the previous quarter, as well as a impairment of approximately $85 million of loans funded directly by the channel. related to the failure of a merger of lenders. For now, the prudent course would be to cancel the advance, even if a recovery remains possible, if SUNL reaches a settlement with the installer or if the installer’s customers are discharged to a peer under the aegis from SUNL.

Negative implications for guidance

Adding to the uncertainty, SUNL withdrew its earlier outlook for FY22, citing the installer liquidity event and interest rate volatility. It should be noted that this follows a previous reduction in the full-year forecast – recall that in the second quarter of 2022, the funded volume was revised to $2.8-3.0 billion (from $2.9 to $3.1 billion), total revenue at $130-140 million (down from $145-155 million previously) and adjusted EBITDA at $35-40 million (down from $55-60 million ).

Revision of Q2 2022 guidelines

Sunlight Financial

So while management views this as an idiosyncratic install event, more downward revisions are very likely on the charts from here. Expect loan production to experience the biggest impact, leading to pressure on near-term platform fees and deteriorating P&L. I suspect SUNL could also post more loss provisions if the macro situation deteriorates, although the next advances from the larger partners are much smaller at less than $10 million. In the meantime, SUNL has over $60 million of cash on the balance sheet, which may or may not constitute an adequate cash reserve depending on the outcome of its re-underwriting process.

Cash balance Q2 2022

Sunlight Financial

Another outside chance of a takeaway

While I’m cautious about SUNL’s outlook, the company operates in an attractive space (residential solar financing) with secular tailwinds. So the advantage here is that a potential buyer emerges if the stock gets too cheap. On the one hand, the high end of the SUNL loan portfolio could be attractive to a bank/depository institution with access to lower cost deposit funding. Solar manufacturers could also consider SUNL as a low-cost way to create a captive finance unit, especially with the current book value discount >80% (or ~57% discount on tangible book).

Preview of the loan book

Sunlight Financial

In the meantime, the ongoing Inflation Reduction Act and the multi-year extension of the Solar Investment Tax Credit offer upside volume from the current guidance numbers. On the other hand, any upside must be weighed against the prospect of an economic recession in the coming months, and while awaiting clarity on the state of the SUNL book, potential buyers may take a “wait-and-see” approach. . The recently authorized buyback program of approximately $50 million (in August 2022, SUNL repurchased approximately $5.6 million) is positive but will likely prove insufficient to sustain the stock ahead of the next difficult months.

hard times

SUNL’s latest writedown statement does not bode well for the near-term outlook. Although management says this is an isolated event, profitability could come under increased pressure amid lower loan production and the prospect of more bankruptcies (and loss provisions) in the future. course of the next few months.

To be clear, SUNL’s long-term history of facilitating lending in high-growth markets (solar and home improvement) has a long track. Still, the company will face short-term turbulence caused by higher rates and a possible global recession. Both events imply not only a higher yield hurdle for its banking partners, but also lower loan issuance as SUNL is forced to raise prices for consumers. The stock has devalued significantly over the past few weeks, but given the challenges across the value chain and the risk of executing the business ahead, the risk/reward ratio remains unfavourable.