July 14, 2026
Eric Daucher, a bankruptcy partner with Norton Rose Fulbright in New York, talked at our 35th energy finance conference in June near San Francisco about what can be learned from recent bankruptcies in the independent power sector. The moderator is Keith Martin with Norton Rose Fulbright in Washington.
MR. MARTIN: You do not have to have paid terribly close attention to the trade press to know that there have been some notable recent bankruptcies of solar-related companies. Sunnova, SunPower, Pine Gate Renewables, Mosaic and PosiGen come to mind quickly.
Eric, you said when we were preparing for this segment, "There is a significant underappreciation for how vulnerable many developers are." How so?
MR. DAUCHER: There are a few different pieces. The biggest one is the amount of leverage. Any number of developers over time develop big structured finance stacks that effectively sit underneath their ownership vehicles.
That's fine as long as your assumptions about interest rates, demand, regulatory support, tax support and other factors remain the same and are correct. However, if some of those start moving in the wrong direction when you have significant underlying leverage, it can kick you pretty quickly.
I think we saw that in spades over the last two years. We were involved in one way or another in each of the bankruptcies you mentioned.
The conversation almost always starts with, "Hey, I'm pretty sure this company is fine, but I'd like you to take a quick look at it." A month or two later, it would be, "Actually, the company will need to restructure, but don't worry, it is not as bad as X," meaning whichever one we had just done last. "It is definitely not going to be a Chapter 11." Somebody would then work on an out-of-court restructuring. Then that idea would die for one reason or another. Then the inevitable drops. The company ends up in Chapter 11. Sunnova is the most dramatic example.
It was a public company. It closed on a financing at the beginning of March last year. A lot of smart people put their money into it. Yet the company was in bankruptcy by June. It had at least $8 billion in capital across the entire capital stack. The point is things go wrong in these cases in a pretty quick and dramatic way.
MR. MARTIN: The trapdoor opens suddenly at the end.
MR. DAUCHER: Everything is fine until it isn't.
Three Lessons
MR. MARTIN: You told me there are three main lessons that you have taken away from watching recent bankruptcies.
One is that companies that view the asset management function as a cost center rather than an independent line of business invariably get assets that underperform. They see a jump in value if they farm out the asset management function to a third party.
Is it realistic for a company whose core business is owning operating assets to rely on a third party to handle operations?
MR. DAUCHER: You have people who are really good at developing assets. That is a different skill set from owning and maintaining them over time. Solar developers who are struggling financially almost universally cannot tell their financiers where every dollar is at a given time.
The problems with some of these companies can be solved with better servicing. I told one lender group that we were negotiating with on one of the recent bankruptcies about the concessions it was going to have to make. I said, "Your project is underwater." They looked at me and said "How dare you. We are in a good position on this." I said "No, your project is literally underwater. Let's go look."
It had flooded. Why had it flooded? The drainage wasn't built properly. There were no culverts installed. The project was inches away from the inverters being underwater, at which point an entire project would have gone up in smoke.
In my view, this happened because the company was not focused enough on asset management. The business model was develop the next project, develop the next one, develop the next one, and so on, which is great if that is your skill set, but then bring in people who really know the asset management piece of it and can tell you in real time how much power is being produced, where every dollar is, what needs to be done to ensure things are getting back online and performing as planned. There is tremendous value to be unlocked.
MR. MARTIN: That is lesson number one. Lesson number two is that mezzanine financing structures are an "underappreciated vulnerability." Why?
MR. DAUCHER: Because when a company is in distress, the covenants in the mezzanine loan documents don't really matter. My finance colleagues' eyes always widen when I tell them that. They say, "Wait, you are telling me loan covenants don't matter?" I say, "No, covenants matter, but they stop mattering when the counterparty is going to be in default anyway."
Covenants are things that borrowers want to avoid breaching so that they do not default on loans. But if they are going to be in default for a financial reason anyway, breaking a covenant may not matter to them.
For example, you may have mezzanine financing on top. You may have some back leverage below it. You may have a host of unencumbered boxes in between. The borrower promises in a covenant not to encumber those boxes and, if it does, that is a breach of the mezzanine financing. But if the company will end up in breach anyway -- say the project is struggling -- the borrower may decide it is better off bringing in additional dollars between the mezzanine lender and the assets that are the source of value.
We have been having a lot of tough conversations with people around the reality of that position. It is worth the effort to pay attention to those vulnerabilities and fix them.
MR. MARTIN: How does a lender fix them?
MR. DAUCHER: Where possible, get guarantees and all-assets liens on all of the unencumbered boxes. In some circumstances, such as where your deal is structured as a joint venture that resembles a mezzanine financing, you may also be able to get governance-level protections. The point is not to leave space in the capital stack for someone to prime you structurally.
I will also say that I do not regard the currently prevailing structures as mistakes. In the past, that is where the market was in terms of the level of protections you could reasonably obtaina commercially. That was driven by how well these assets had performed, as a class, over time. Now that the market has moved in terms of asset performance, the protections should move as well.
MR. MARTIN: Lesson three is that there can be a wide gap between how financing structures read on paper and how they are actually implemented. What do you mean by that?
MR. DAUCHER: Most financings in this space look on paper like proper project financings. Dollars come in and go into a lockbox account. Ultimately, they will flow up through a waterfall in an orderly way. Everything on paper looks exactly as it should be.
Then you look into what the company is actually doing. For distressed businesses, it does not always look in practice like it does on paper. Every dollar that comes in somehow gets deposited in a single account up at the parent company or some operating company. You have cash flows from a bunch of different silos being commingled. That is the most egregious example, but it happened in one of the cases you mentioned, and it was to the tune of a very large number of dollars.
Having real-time awareness of where dollars are and being able to see they are moving as envisioned in the waterfall is incredibly important.
MR. MARTIN: You said you have also seen distressed companies sell the same assets into multiple tax equity vehicles or pledge the same assets to multiple lenders, even though they committed not to do that.
MR. DAUCHER: Yes. It happened in a couple of the recent bankruptcies. One of them confessed to it in the first-day declaration filed with the bankruptcy court.
That then leads to disputes around who owns which assets. How do we resolve who owns them? How do we do that in a cash-efficient manner? It gets incredibly messy. If you have been following the money closely, it is easier to identify early if money is not where it is supposed to be. A warning sign is where money is not being segregated but rather is in basically one cash register that people take money out of when they need it.
MR. MARTIN: What can lenders and tax equity investors do to protect themselves? Is it just having their own equivalent asset management function that pays close attention to details?
MR. DAUCHER: What you need is to increase the standard of what you expect in terms of information. You do not necessarily need daily cash reporting, but if somebody cannot give you that when you ask, you should ask why.
An occasional spot check is a good idea. Can you tell me what a particular project is producing now? What is it selling for? Where are the dollars going? How much is in each waterfall account? It is not like an audit, but if somebody cannot give that level of specificity, you should probe further.
Having that level of insight is good both for financiers and the company. It prevents mistakes. It is not as though companies set out to do wrong by their lenders. It is that they do not have close control over their own cash. Mistakes compound very quickly when you do not have that level of insight into your own assets.
Buying Distressed Assets
MR. MARTIN: Two more questions. First, are bankruptcy proceedings a good way to pick up assets or valuable development rights or is the process too time consuming and there is no such thing as bargain assets?
MR. DAUCHER: Yes, no and depends. Yes, it is a really good way to pick up assets.
MR. MARTIN: Don't the creditors have first claim?
MR. DAUCHER: No, a secured creditor can "credit bid" the value of its debt. Suppose secured creditors have $100 million secured by a particular silo of assets. Rather than laying out extra cash, they can say they are putting their debt on the table. Anybody who wants to overbid them had better show up with $100 million of cash plus whatever the bid increment is. The secured creditors do not have the right simply to take the assets out of bankruptcy for themselves.
That is only secured creditors. They get to do that only with respect to the collateral securing their loans. Unsecured creditors such as bondholders do not have that right, and secured creditors secured by this box of assets, not that box of assets, are limited in what they can credit bid on, at least in principle.
It is a very good way for people who have both financial and operational capability to pick up assets.
However, it can be too time consuming. Bankruptcy has become tremendously expensive. The longer the company is in bankruptcy, the more expensive it is.
Whether assets can be picked up at bargain prices depends. If you can buy a distressed asset at a lower price and it is distressed for an operational reason that you can fix, but the next guy might not be able to fix, then you can find real bargains. The underlying levered nature of the assets means that if you can eke out a 15% improvement in performance, the effect is magnified.
You go from something that is underperforming and underwater, like a money-losing asset or at best a breakeven asset, to making five times your investment because of the underlying leverage.
You need to be able to improve the asset. You need guys with toolbelts who will actually get out there in the field if you are going to unlock real value.
MR. MARTIN: Bankruptcy work is cyclical. It obviously peaks during recessions. Where in the cycle does it feel like we are currently?
MR. DAUCHER: We are in a pre-recession mania phase. The IPO market suggests to me that bankruptcy lawyers are going to be really busy over the next couple years. It is not because companies that are going public will go bust . . . .
MR. MARTIN: You are referring to the SpaceX public offering?
MR. DAUCHER: That is one of them. Any company that manages to go public at a gigantic value while still losing money tells me that something in the market is strange. SpaceX is an example. I am not suggesting it is a bad investment. There are other companies lined up behind it.
A lot of capital has been invested directly in AI and in the energy space based on an AI thesis. I am sure many of those bets will pan out, but not all of them will. The bankruptcy lawyers will see work flowing from that over the next couple years. The IPO world is telling me something is off.
MR. MARTIN: Audience, any questions for Eric Daucher? [Silence] It is a topic that is too hot to touch. Eric, thank you so much for your time.