Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurement

v3.22.2.2
Fair Value Measurement
 9 Months Ended
Sep. 30, 2022
Fair Value Disclosures [Abstract]  
Fair Value Measurement Fair Value Measurement
The carrying values and fair values of Sunlight’s assets and liabilities recorded at fair value on a recurring or non-recurring basis, as well as other financial instruments for which fair value is disclosed, at September 30, 2022 and December 31, 2021 were as follows:

Principal Balance or Notional Amount Carrying Value Fair Value
Level 1 Level 2 Level 3 Total
September 30, 2022 (Successor)
Assets:
Financing Receivables:
Loan participations, held-for-investment $ 3,817  $ 3,332  $ —  $ —  $ 3,160  $ 3,160 
Loans, held-for-investment 278  249  —  —  220  220 
Cash and cash equivalents 70,569  70,569  70,569  —  —  70,569 
Restricted cash 1,228  1,228  1,228  —  —  1,228 
Contract derivatives 39,793  462  —  —  462  462 
Liabilities:
Debt 20,613  20,613  —  —  20,613  20,613 
Warrants 312,225  3,691  —  —  3,691  3,691 
Contract derivatives 82,251  1,298  1,298  1,298 
Guarantee obligation n.a. 2,299  —  —  2,299  2,299 
December 31, 2021 (Successor)
Assets:
Financing Receivables:
Loan participations, held-for-investment 4,584  4,051  —  —  4,260  4,260 
Loans, held-for-investment 291  262  —  —  250  250 
Cash and cash equivalents 91,882  91,882  91,882  —  —  91,882 
Restricted cash 2,018  2,018  2,018  —  —  2,018 
Contract derivatives 76,770  1,411  —  —  1,411  1,411 
Liabilities:
Debt 20,613  20,613  —  —  20,613  20,613 
Warrants 312,225  19,007  —  —  19,007  19,007 
Guarantee obligation n.a. 418  —  —  418  418 


Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value.
Sunlight’s assets and liabilities measured at fair value on a recurring basis using Level 3 inputs changed as follows:

Assets Liabilities
Contract Derivatives Contract Derivatives Warrants
December 31, 2021 (Successor) $ 1,411  $ —  $ 19,007 
Transfers(a)
Transfers to Level 3 —  —  — 
Transfers from Level 3 —  —  — 
Gains (losses) included in net income(b)
Included in change in fair value of warrant liabilities —  —  (15,316)
Included in change in fair value of contract derivatives, net (949) 1,298  — 
Included in realized gains on contract derivatives, net 257  3,429  — 
Payments, net (257) (3,429) — 
September 30, 2022 (Successor) $ 462  $ 1,298  $ 3,691 
December 31, 2020 (Predecessor) $ 1,435  $ —  $ 5,643 
Transfers(a)
Transfers to Level 3 —  —  41,591 
Transfers from Level 3 —  —  (11,148)
Gains (losses) included in net income(b)
Included in change in fair value of warrant liabilities —  —  5,504 
Included in change in fair value of contract derivatives, net (662) —  — 
Included in realized gains on contract derivatives, net 2,992  —  — 
Payments, net (2,992) —  — 
July 9, 2021 (Predecessor) 773  —  41,590 
Transfers(a)
Transfers to Level 3 —  —  — 
Transfers from Level 3 —  —  — 
Gains (losses) included in net income(b)
Included in change in fair value of warrant liabilities —  —  (10,116)
Included in change in fair value of contract derivatives, net 489  —  — 
Included in realized gains on contract derivatives, net 1,377  —  — 
Payments, net (1,377) —  — 
September 30, 2021 (Successor) $ 1,262  $ —  $ 31,474 
a.Transfers are assumed to occur at the beginning of the respective period, except transfers that occurred at the Closing Date of the Business Combination.
b.Increases in the fair value of liabilities represent losses included in net income.

Contract Derivative Valuation — Fair value estimates of Sunlight's contract derivatives are based on an internal pricing model that uses a discounted cash flow valuation technique, incorporates significant unobservable inputs, and includes assumptions that are inherently subjective and imprecise. Significant inputs used in the valuation of Sunlight’s contract derivatives include:

Contract Derivative Significant Inputs
1 Inputs include expected cash flows from the financing and sale of applicable Indirect Channel Loans and discount rates that market participants would expect for the Indirect Channel Loans. Significant increases (decreases) in the discount rates in isolation would result in a significantly lower (higher) fair value measurement.
2 Inputs include expected prepayment rate of applicable Indirect Channel Loans sold to the Indirect Channel Loan Purchaser. Significant increases (decreases) in the expected prepayment rate in isolation would result in a significantly higher (lower) fair value measurement.
The following significant assumptions were used to value Sunlight’s contract derivative:

Successor
September 30, 2022 December 31, 2021
Contract Derivative 1
Discount rate 11.7  % 10.0  %
Weighted average life (in years) 0.1 0.2
Contract Derivative 2
Expected prepayment rate 75.0  % 75.0  %

Compensation Unit and Warrant Valuation — Sunlight uses the observed market price of its publicly-traded Class A Shares and the warrants thereon to measure the value of RSU awards on the grant date and the value of Public Warrants, respectively. For Private Placement Warrants, Sunlight uses an independent third-party valuation firm to value those warrants using a Monte Carlo option pricing model, which includes the following estimates of underlying asset value, volatility, dividend rates, expiration dates, and risk-free rates:
Successor
Assumption September 30, 2022
Class A common share value per share(a)
$ 1.24 
Implied volatility(a)
79.2  %
Dividend yield(b)
—  %
Time to expiry (in years)(a)
3.8 
Risk free rate(a)
4.1  %
a.Significant increases in these assumptions in isolation would result in a higher fair value measurement.
b.Significant increases in these assumptions in isolation would result in a lower fair value measurement.

Predecessor

To determine the grant-date value of each Class C Unit and LTIP Unit granted prior to the Business Combination, an independent third-party valuation firm (a) used an income valuation approach to determine the fair value of Sunlight’s equity on a quarterly basis and (b) allocated that fair value to each class of interest in Sunlight’s equity and warrants thereon on a per unit basis using an option pricing method. Sunlight determined the grant-date fair value of an award using the value at the quarter-end closest to the grant date of the award. Significant increases (decreases) in the cost of equity, volatility, tax rate, and equity term in isolation would result in a significantly lower (higher) fair value measurement.

To determine the fair value of warrants prior to the Business Combination, Sunlight applied a hybrid probability-weighted expected return valuation method, which incorporated two scenarios: (a) a scenario using a market valuation approach that assumed Sunlight completed the Business Combination and (b) a remain private scenario that used the aforementioned income valuation approach.

Goodwill — In connection with Sunlight’s goodwill assessment (Note 2), the Company valued its single reporting unit using an equal-weighted valuation methodology, which incorporated (a) an income approach using a discounted cash flow analysis and (b) a market approach using publicly-traded companies similar to Sunlight.