Hannon Armstrong Sets the Record Straight on Muddy Waters’ Deceptive Report
13 Juli 2022 - 10:52PM
Business Wire
Hannon Armstrong Sustainable Infrastructure Capital, Inc.
("Hannon Armstrong," "we," "our" or the "Company") (NYSE: HASI), a
leading investor in climate solutions, today issued the following
statement in response to baseless allegations made in a fallacious
short attack report by Muddy Waters Capital LLC on July 12,
2022.
For more than 40 years, Hannon Armstrong has operated with the
highest level of integrity, which includes providing audited,
accurate and timely financial statements. Muddy Waters’ report
questions the integrity of these financial statements by relying on
factual errors and inflammatory and misleading statements. Hannon
Armstrong believes that its accounting is fully compliant with GAAP
and SEC regulations and is an accurate representation of our
financial performance. We supplement our GAAP financial statements
with certain non-GAAP measures, including a metric we refer to as
Distributable Earnings. We believe these non-GAAP measures are a
useful supplement to our GAAP earnings for our investors and we
fully disclose our Distributable Earnings methodology and
adjustments in our SEC filings. In addition to EY serving as our
independent auditor, Hannon Armstrong works with another of the
“Big Four” accounting firms on risk management and disclosure
controls, including on our equity method investments. We believe
that this comprehensive approach and commitment to financial
integrity is in stark contrast to the false allegations made in the
report.
The report presents both an array of factual errors and numerous
inflammatory and misleading statements demonstrating a fundamental
lack of understanding of our financial statements and our business.
It insinuates that our non-cash earnings (a) indicate a shortfall
in cash available to pay our dividend, (b) result in inflated
earnings and (c) reflect distressed borrowers/projects. In fact,
our non-cash earnings do not impact our ability to fund our
dividend, are intentionally structured at underwriting and are not
indicative of distress.
While we will not engage in a tit for tat rebuttal of every
falsehood in the report, it is important to set the record straight
on the following key points:
- We have sufficient portfolio cash flow to pay our
dividend. The report assumes the non-cash earnings present in
our financial statements result in a shortfall in the cash flow
required to fund our dividend each year. This is absolutely false.
We have internal processes to rigorously model our liquidity and
expected cash flow and our expectations consistently reflect that
portfolio cash flows remain adequate to cover our dividend. In
order to provide the most up to date information, we will introduce
additional non-GAAP disclosures to support this statement in
our Q2 earnings report scheduled for August 4, 2022.
- Because HLBV accounting is complex and does not reflect our
economics in any one period, we use Distributable Earnings as a
supplemental disclosure. For certain Equity Method Investments
in renewable energy projects, GAAP permits the use of Hypothetical
Liquidation at Book Value (“HLBV”). These investments also
typically include a tax equity investor that is allocated tax
credits. At the time of these tax credit allocations, the remaining
investors (including Hannon Armstrong) are often allocated a large
gain. The report suggests there is something improper about our
HLBV allocations since there is no corresponding cash. However,
this accounting is required when the HLBV methodology is utilized,
and we fully disclose that we expect to recover the carrying value
of our investment over time. In addition, we perform an impairment
analysis each quarter to substantiate the carrying value of these
investments. We provide our non-GAAP Distributable Earnings metric
in-part to reverse our HLBV allocations and make an adjustment that
reflects earnings that are consistent with our economics for the
period. The report also alleges that we are allocated the tax
credits, we are improperly inflating our earnings, we round trip
cash to our equity method investments, and we fail to disclose
related party transactions. All of these allegations are false. The
report lacks any basic understanding of the income and cashflows
associated with renewable projects and standard accounting practice
for these projects.
- SunStrong cashflows are from residential solar portfolios,
which is one of the strongest performing ABS asset classes. All
transactions have business substance and are executed at arm’s
length. As is customary in joint venture transactions, we do not
have unilateral control of the governance and we do not exercise
voting rights with respect to related party transactions. None of
the income that we booked from SunStrong is unrealizable. All
related party transactions are disclosed as such. We have not
“round-tripped” any cash from SunStrong in order to inflate our
earnings.
- We incurred zero losses on our securitization residuals
during the last 20 years and our market-based discount rates
reflect that. While the report inaccurately claims we
manipulate the discount rate on our securitizations and residuals
resulting in inflated gains and residual balances, the fact, is
that we use market-based assumptions in calculating discount rates.
These assumptions utilize market rates of interest and risk
premiums, and our residuals are fully supported by expected future
cash flows. The report mentions an expectation that our discount
rate should reasonably be in the “high teens” for a subordinated
interest in commercial receivables disregarding the fact that the
receivables we are securitizing are of high credit quality and in
many cases are with government obligors or other low risk assets,
as evidenced by our zero historical loss rate on residuals.
Therefore, a lower discount rate should be expected.
- The PIK in our loans is intentionally structured to match
the cashflows of underlying projects. The report alleges
improper recording of Payment-in-Kind (“PIK”) interest. Our PIK
interest is not indicative of distressed borrowers and was fully
contemplated in our underwriting. This PIK interest is typically
the result of tax equity investors being allocated cash in the
early years of the transaction resulting in our cash flow
allocation being below our loan interest rate. Because there is
sufficient cash flow to pay all of our interest, these loans that
are categorized as PIK in the early years have cash flow that
exceeds earnings in the later years. This accounting is in
accordance with GAAP and consistent with our economic results. We
disclose our policies on accounting for our Commercial and
Government receivables, in which we assess the collectability of
amounts we have recorded as income and will cease to recognize
income if we believe there is substantial doubt on our ability to
collect these amounts. We perform this analysis quarterly and have
concluded that our PIK interest is fully realizable.
“We have a long history of adhering to the highest ethical and
professional standards, and we will proactively communicate with
our investors, clients and other stakeholders,” said Jeffrey W.
Eckel, Hannon Armstrong Chairman and CEO. “We are committed to
fiercely defending our Company, while continuing to prove our
investment thesis of making better risk-adjusted returns investing
on the right side of the climate change line.”
About Hannon Armstrong
Hannon Armstrong (NYSE: HASI) is the first U.S. public company
solely dedicated to investments in climate solutions, providing
capital to assets developed by leading companies in energy
efficiency, renewable energy, and other sustainable infrastructure
markets. With $9 billion in managed assets, our core purpose is to
make climate positive investments with superior risk-adjusted
returns. For more information, please visit hannonarmstrong.com or
follow us on Twitter and Linkedin.
Forward-Looking Statements
Some of the information contained in this press release is
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended that are subject to
risks and uncertainties. For these statements, we claim the
protections of the safe harbor for forward-looking statements
contained in such Sections. These forward-looking statements
include information about possible or assumed future results of our
business, financial condition, liquidity, results of operations,
plans and objectives. When we use the words "believe," "expect,"
"anticipate," "estimate," "plan," "continue," "intend," "should,"
"may" or similar expressions, we intend to identify forward-looking
statements.
Forward-looking statements are subject to significant risks and
uncertainties. Investors are cautioned against placing undue
reliance on such statements. Actual results may differ materially
from those set forth in the forward-looking statements. Factors
that could cause actual results to differ materially from those
described in the forward-looking statements include those discussed
under the caption “Risk Factors” included in our most recent Annual
Report on Form 10-K as well as in other periodic reports that we
file with the U.S. Securities and Exchange Commission
Forward-looking statements are based on beliefs, assumptions and
expectations as of the date of this press release. We disclaim any
obligation to publicly release the results of any revisions to
these forward-looking statements reflecting new estimates, events
or circumstances after the date of this press release.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20220713005883/en/
Investors: Neha Gaddam investors@hannonarmstrong.com
410-571-6173 Media: Gil Jenkins media@hannonarmstrong.com
443-321-5753
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