HA Sustainable Infrastructure Capital, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Long-term Debt

Long-term Debt

9 Months Ended

Sep. 30, 2018

Debt Disclosure [Abstract]

Long-term Debt

Non-recourse debt

We have outstanding the following asset-backed non-recourse debt and bank loans:



	Outstanding Balance as of										Anticipated Balance at Maturity		Value of Assets Pledged as of
	September 30, 2018			December 31, 2017			Interest Rate			Maturity Date	Anticipated Balance at Maturity		September 30, 2018		December 31, 2017		Description of Assets Pledged
	(dollars in millions)
HASI Sustainable Yield Bond 2013-1	$	62		$	67		2.79	%		December 2019	$	57	$	83	$	86	Receivables
ABS Loan Agreement ⁽¹⁾	—			81			5.74	%		—	—		—		79		Equity interest in Strong Upwind Holdings I, LLC
HASI Sustainable Yield Bond 2015-1A	91			94			4.28	%		October 2034	—		135		137		Receivables, real estate and real estate intangibles
HASI Sustainable Yield Bond 2015-1B Note	13			14			5.41	%		October 2034	—		135		137		Class B Bond of HASI Sustainable Yield Bond 2015-1
2017 Credit Agreement	124			180			4.12	%		January 2023	—		160		226		Equity interests in Strong Upwind Holdings I, II, III, and IV LLC, and Northern Frontier, LLC
HASI SYB Loan Agreement 2015-2	33			36			6.47	%	⁽²⁾	December 2023	—		72		68		Equity interest in Buckeye Wind Energy Class B Holdings LLC, related interest rate swap
HASI SYB Loan Agreement 2015-3	137			143			4.92	%		December 2020	127		167		171		Residential solar receivables, related interest rate swaps
HASI SYB Loan Agreement 2016-1	119			121			5.40	%	⁽²⁾	November 2021	106		141		143		Residential solar receivables, related interest rate swaps
HASI SYB Trust 2016-2	81			81			4.35	%		April 2037	—		82		86		Receivables
2017 Master Repurchase Agreement	47			35			5.00	%	⁽²⁾	July 2019	42		51		38		Receivables and investments
HASI ECON 101 Trust	133			134			3.57	%		May 2041	—		135		140		Receivables and investments
HASI SYB Trust 2017-1	160			162			3.86	%		March 2042	—		208		209		Receivables, real estate and real estate intangibles
Other non-recourse debt ⁽³⁾	120			90			2.26% - 7.45%			2018 to 2046	18		177		162		Receivables
Debt issuance costs	(24		)	(27		)
Non-recourse debt ⁽⁴⁾	$	1,096		$	1,211


(1)	This non-recourse debt agreement was re-financed in the third quarter of 2018 with the same lender with the PF Credit Facility as discussed in Note 7.


(2)	Interest rate represents the current period’s LIBOR based rate plus the spread. Also see the interest rate swap contracts shown in the table below, the value of which are not included in the book value of assets pledged or the interest rate of the debt instrument.


(3)	Other non-recourse debt consists of various debt agreements used to finance certain of our receivables for their term. Debt service payment requirements, in a majority of cases, are equal to or less than the cash flows received from the underlying receivables.


(4)	The total collateral pledged against our non-recourse debt was $1,411 million and $1,545 million as of September 30, 2018 and December 31, 2017, respectively. In addition, $59 million of our restricted cash balance was pledged as collateral to various non-recourse loans as of September 30, 2018 and December 31, 2017.

We have pledged the financed assets, and typically our interests in one or more parents or subsidiaries of the borrower that are legally separate bankruptcy remote special purpose entities as security for the non-recourse debt. There is no recourse for repayment of these obligations other than to the applicable borrower and any collateral pledged as security for the obligations. Generally, the assets and credit of these entities are not available to satisfy any of our other debts and obligations. The creditors can only look to the borrower, the cash flows of the pledged assets and any other collateral pledged, to satisfy the debt and we are not otherwise liable for nonpayment of such cash flows. The debt agreements contain terms, conditions, covenants, and representations and warranties that are customary and typical for transactions of this nature, including limitations on the incurrence of liens and indebtedness, investments, fundamental organizational changes, dispositions, changes in the nature of business, transactions with affiliates, use of proceeds and stock repurchases. The agreements also include customary events of default, the occurrence of which may result in termination of the agreements, acceleration of amounts due, and accrual of default interest. We typically act as servicer for the debt transactions. We are in compliance with all covenants as of September 30, 2018 and December 31, 2017.

We have guaranteed the accuracy of certain of the representations and warranties and other obligations of certain of our subsidiaries under certain of the debt agreements and provided an indemnity against certain losses from “bad acts” of such subsidiaries including fraud, failure to disclose a material fact, theft, misappropriation, voluntary bankruptcy or unauthorized transfers. In the case of the debt secured by certain of our renewable energy equity interests, we have also guaranteed the compliance of our subsidiaries with certain tax matters and certain obligations if our joint venture partners exercise their right to withdraw from our partnerships.

In connection with several of our non-recourse debt borrowings, we have entered into the following interest rate swaps that are designated as cash flow hedges:



				Notional Value as of				Fair Value as of
	Base Rate	Hedged Rate		September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017			Term
				(dollars in millions)
HASI SYB Loan Agreement 2015-2	3 month LIBOR	1.52	%	$	30	$	31	$	0.1	$	0.1		December 2015 to December 2018
HASI SYB Loan Agreement 2015-2	3 month LIBOR	2.55	%	29		29		0.4		(0.2		)	December 2018 to December 2024
HASI SYB Loan Agreement 2015-3	1 month LIBOR	2.34	%	119		119		3.0		—			November 2020 to August 2028
HASI SYB Loan Agreement 2016-1	3 month LIBOR	1.88	%	111		120		3.7		1.1			November 2016 to November 2021
HASI SYB Loan Agreement 2016-1	3 month LIBOR	2.73	%	107		107		1.7		(1.1		)	November 2021 to October 2032
2017 Master Repurchase Agreement	3 month LIBOR	2.42	%	32		32		1.0		—			August 2019 to March 2033
Total				$	428	$	438	$	9.9	$	(0.1	)

The fair values of our interest rate swaps designated and qualifying as effective cash flow hedges are reflected in our consolidated balance sheets as a component of other assets (if in an unrealized gain position) or accounts payable, accrued expenses and other (if in an unrealized loss position) and in net unrealized gains and losses in AOCI. As of September 30, 2018 and December 31, 2017, all of our derivatives were designated as hedging instruments which were deemed to be effective. The following is a presentation of the total balance of the financial statement line item related to our hedging activities in our consolidated statements of operations and the impact of our hedges that is included in this total balance.



	Three months ended September 30,					Nine months ended September 30,
	2018			2017		2018			2017
	(in thousands)
Total interest expense	$	19,681		$	17,584	$	57,424		$	46,728
Impact of hedging	(198		)	201		(286		)	798

The stated minimum maturities of non-recourse debt as of September 30, 2018, were as follows:



	Future minimum maturities
	(in millions)
October 1, 2018 to December 31, 2018	$	19
2019	139
2020	156
2021	135
2022	27
2023	62
Thereafter	582
Total minimum maturities	$	1,120
Deferred financing costs, net	(24		)
Total non-recourse debt	$	1,096

The stated minimum maturities of non-recourse debt above include only the mandatory minimum principal payments. To the extent there are additional cash flows received from our investments in renewable energy projects serving as collateral for certain of our non-recourse debt facilities, these additional cash flows are required to be used to make additional principal payments against the respective debt. Any additional principal payments made due to these provisions may impact the anticipated balance at maturity of these financings.

SunPower and its subsidiaries, which originated and service the residential solar leases that are the collateral for the HASI SYB Loan Agreement 2015-3, have provided us certain limited indemnities and warranties and as servicer, provide various services including billing, monitoring payments by homeowners to a third-party lockbox and customer service. The portfolios of residential solar leases are held in bankruptcy remote special purpose entities (“SPEs”) that are performing in line with our expectations and the SPEs, and not SunPower, are the source of repayment under our loans.

In June 2017, SunPower amended a loan agreement to remove a debt-to-EBITDA leverage covenant with which SunPower was not in compliance. Two of our loan agreements included the same debt-to-EBITDA covenant to monitor changes in SunPower’s credit, as is typical for a servicer. One of our loan agreements, HASI SYB Loan Agreement 2015-3, still contains this covenant and as a result our lender is entitled to apply approximately $1 million of the cash flow after payment of principal and interest each quarter to further reduce the principal balance on this loan. We continue to monitor the situation and anticipate having further discussions with our lenders and with SunPower but at the present time, do not anticipate any other impact.

Convertible Senior Notes

We issued $150 million aggregate principal amount ($145 million net of issuance costs) of 4.125% convertible senior notes due September 1, 2022. Holders may convert any of their convertible notes into shares of our common stock at the applicable conversion rate at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date, unless the convertible notes have been previously redeemed or repurchased by us. The convertible notes are senior unsecured obligations of ours and have an initial conversion rate of 36.7107 shares for each $1,000 principal amount of convertible notes which is equal to a total of approximately 5.5 million shares with an initial conversion price of $27.24. The conversion rate is subject to adjustment for dividends declared above $0.33 per share per quarter and certain other events that may be dilutive to the holder. As of September 30, 2018, none of these dilutive events have occurred and the conversion rate remains at the initial rate.

Following the occurrence of a make-whole fundamental change, we will, in certain circumstances, increase the conversion rate for a holder that converts its convertible notes in connection with such make-whole fundamental change. There are no cash settlement provisions in the convertible notes and the conversion option can only be settled through physical delivery of our common stock. Additionally, upon the occurrence of certain fundamental changes involving us, holders of the convertible notes may require us to redeem all or a portion of their convertible notes for cash at a price of 100% of the principal amount outstanding, plus accrued and unpaid interest.

We have a redemption option to call the convertible notes prior to maturity (i) on or after March 1, 2022 and (ii) at any time if such a redemption is deemed reasonably necessary to preserve our qualification as a REIT. The redemption price will be equal to the principal of the notes being redeemed, plus accrued and unpaid interest. In the event of redemption after March 1, 2022, there will be an additional make-whole premium paid to the holder of the redeemed notes unless the redemption is deemed reasonably necessary to preserve our qualification as a REIT.

The following table presents a summary of the components of the convertible notes:



	September 30, 2018			December 31, 2017
	(in millions)
Principal	$	150		$	150
Accrued interest	1			3
Less:
Unamortized financing costs	(4		)	(5		)
Carrying value of convertible notes	$	147		$	148

During the three and nine months ended September 30, 2018, we recorded $2 million and $5 million in interest expense related to the convertible notes, respectively, compared to $0.8 million in interest expense in the three and nine months ended September 30, 2017.