Quarterly report pursuant to Section 13 or 15(d)

Derivatives

v3.23.2
Derivatives
 6 Months Ended
Jun. 30, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives Derivatives
Sunlight has entered into two agreements considered derivatives under GAAP that are subject to interest rate, credit, and/ or prepayment risks. Interest rate risk is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, as well as other factors. Credit risk includes a borrower’s inability or unwillingness to make contractually required payments. Prepayment risk includes a borrower’s payment, or lack of payment, of contractual Loan amounts prior to the date such amounts are contractually due.

Contract Derivative #1 — In January 2019, Sunlight entered into an agreement with its Bank Partner to arrange Indirect Channel Loans for the purchase and installation of home improvements other than residential solar energy systems. The agreement (a) entitles Sunlight to cash flows collected from the portfolio of Indirect Channel Loans held by its Bank Partner in excess of a contractual rate, based upon one-month LIBOR plus a fixed spread, and (b) requires Sunlight to pay its Bank Partner for portfolio cash flows below such contractual rate. This contractual arrangement incorporates interest rate and credit risks related to the risk of default on Indirect Channel Loans held by its Bank Partner that results from a borrower’s inability or unwillingness to make contractually required payments. In December 2022, Sunlight and Bank Partner amended the agreement, which removed the indexed contractual rate and the agreement was no longer considered a derivative under GAAP. In April 2023, Sunlight and Bank Partner amended the agreement again, along with an agreement between Sunlight and its Bank Partner to arrange Indirect Channel Loans for the purchase and installation of residential solar energy systems, which includes an embedded derivative feature representing fees Sunlight pays to its Bank Partner based on a floating index and the Indirect Channel Loans held by Sunlight’s Bank Partner.

Contract Derivative #2 — In February 2021, Sunlight entered into an agreement with an Indirect Channel Loan Purchaser to purchase Indirect Channel Loans for the installation of home improvements other than residential solar energy systems. As part of that agreement, Sunlight is entitled to additional sale proceeds upon the prepayment of certain Indirect Channel Loans sold. This contractual arrangement incorporates prepayment risk related to loan prepayment rates below Sunlight’s expectations.
Contract Derivatives

Sunlight’s contract derivatives are recorded at fair value in the accompanying Unaudited Condensed Consolidated Balance Sheets as follows:
Balance Sheet Location June 30, 2023 December 31, 2022
Contract derivative 1(a)
Affiliate contract derivative, at fair value $ 12,902  n.a.
Contract derivative 2 Other assets 164  $ 449 
a.The agreement did not include embedded derivative features under GAAP between December 2022 and April 2023.

The following table summarizes notional amounts related to derivatives:

June 30, 2023 December 31, 2022
Contract derivative 1(a)
$ 520,530  n.a.
Contract derivative 2(b)
14,484  $ 38,805 
a.Represents the carrying value of Indirect Channel Loans held by Sunlight’s Bank Partner. The agreement did not include embedded derivative features under GAAP between December 2022 and April 2023.
b.Represents the unpaid principal balance of the Loans at time of sale to the Indirect Channel Loan Purchaser for which Sunlight is entitled to income in the event of prepayment of the Indirect Channel Loans.
The following table summarizes all income (loss) recorded in relation to derivatives:

For the Three Months Ended June 30, For the Six Months Ended June 30,
2023 2022 2023 2022
Change in fair value of contract derivatives, net
Contract derivative 1 $ (670) $ 214  $ (670) $ (207)
Contract derivative 2 (129) 106  (285) 300 
$ (799) $ 320  $ (955) $ 93 
Realized gains (losses) on contract derivatives, net
Contract derivative 1 $ (12,319) $ 1,976  $ (12,319) $ 3,807 
Contract derivative 2 76  79  199  157 
$ (12,243) $ 2,055  $ (12,120) $ 3,964