Octus on Credit: Corporate securitization vehicles could have their day in court

Mark Fischer, Head of Financial Research

A wave of potential chapter 11 filings of companies that feature securitization vehicles as their primary means of raising debt could test the concept of bankruptcy remoteness as a significant amount of value would reside in these “bankruptcy remote” entities. 

Both Sunnova Energy and Hooters of America are in active discussions with lenders. Rumors have circulated that in-court restructurings are being contemplated as potential options to deal with overleveraged balance sheets, negative cash flow and near term maturities. 

Renewable energy provider, Sunnova, which issued a going concern warning earlier this month, has raised money via securitizations to acquire solar energy systems and loan agreements originated through Sunnova’s network of dealers. In February, Sunnova issued approximately $300 million in solar asset backed notes and another $185 million in a nonrecourse asset-based term loan. Octus recently estimated recoveries for Sunnova’s unsecured notes in a hypothetical bankruptcy finding recoveries varied widely depending on discount rates assumed for the assets at the securitization entities. Complicating recoveries, a significant amount of cash held at unrestricted subsidiaries serves as collateral for nonrecourse financing arrangements. 

Restaurant chain Hooters could follow the fate of TGI Fridays, another restaurant company that relied on securitization financing, and restructure in court. Similar to TGI Fridays and also following a spat of mostly franchised restaurants turning to the securitization markets, Hooters raised a securitization vehicle backed by franchise fees of licensed restaurants. However, Hooters also included EBITDA from company owned restaurants to provide backing for the securitization vehicles. Hooters of America, or HOA, is the manager of the whole business securitization. As a result of the mix of cash flows, the HOA securitization creditors are more exposed to variability in operating costs and therefore, creditors would be more exposed to economic cost considerations made by the parent entity which could conflict with the securitization creditors. 

Every new bankruptcy presents new facts for courts and litigants to scrutinize. If either or both of these companies file, the availability of value at the bankruptcy remote entities will surely be tested. Whether that occurs behind the scenes or is actively litigated remains to be seen.

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