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  "documentTitle": "Sunrun Inc. (RUN)",
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  "authorName": "Carson C. Block",
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  "presentationDate": "2022-07-28 00:00:00",
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  "notes": "The slide argues that insurance is insufficient due to potential fraud exclusions and valuation gaps between claimed FMV and market/cost approaches.",
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      "text": "Moreover, we believe that there is a material risk that any insurance covering potential claw backs may be void if there is a determination of tax fraud, which could subject RUN and the tax equity investors to significant liabilities, and ABS holders to reduced cash flows.",
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      "text": "The ITC was grandfathered at 30% of the FMV; Insurance covers up to 36% of the ITC amount; Our estimate of RUN’s claimed FMV for 2021 was $4.85 / watt; RUN’s 2021 direct sales price (which we view as equivalent to the Market Approach) was $3.16 / watt and our average adjusted Cost Approach valuation was $3.73 / watt, for an overall estimated adjusted FMV of $3.45 / watt;",
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      "text": "However, this likely does not capture the full exposure of the tax equity investor. Even if the insurance policy is honored in full in a timely basis, their full losses may not be covered, if the IRS choses to act.",
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      "text": "As companies like RUN have become more aggressive with the ITCs they claim, Tax Equity investors have required increased protection. Because RUN is not a highly rated corporate credit, and the claw back is a major concentrated risk for RUN, tax equity investors and ABS investors have required insurance for potential IRS claw backs. As a result, Kroll and the tax equity investors have required RUN to procure insurance to cover the IRS’s potential claw back of some of the ITCs and other tax benefits claimed in respect of RUN’s PV Systems.",
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      "text": "With this information, we can calculate the total exposure of the Tax Equity Investor to claw back pre- and post-insurance.",
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      "text": "To understand the underlying exposure of the tax equity investors, we must take a closer look at the insurance for the tax claw back risk. We believe that if the IRS acts to claw back the excess tax benefits, the best the tax equity investor can hope for is protracted litigation preceding a resolution.",
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      "kind": "paragraph",
      "text": "The Sunrun Vulcan 2021-1 securitization, combined with RUN filings and our estimates, produces the following figures:",
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      "text": "RUN indemnifies the tax equity investors should the IRS claw back some of the ITC benefits the tax equity investors have claimed. Given that the Tax Equity Investor is senior to the sponsor equity and the tax equity has the right to all of the cashflows from the PV System, RUN has indemnified the top of the waterfall and therefore, has essentially issued indemnification for all parties for the possible action of the IRS. Moreover, we believe that there is a material risk that any insurance covering potential claw backs may be void if there is a determination of tax fraud, which could subject RUN and the tax equity investors to significant liabilities, and ABS holders to reduced cash flows.",
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      "text": "42 KBRA Rating Report for RUN Vulcan Issuer 2021-1, LLC. 43 RUN 2021 10-K and Q1 2022 Historic Financial and Metric Model; MWC Estimates 44 This is the average of quarterly Subscriber Values in 2021 in 2018, $4.94 / watt, and quarterly estimated RUN Cost Approach valuations of $4.75 / watt.",
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      "text": "Insurance Could be Insufficient to Cover an IRS Claw Back",
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