Wood pellets in a Berlin depot. U.S. wood pellet production, similar to Enviva’s is driven by exports, particularly to European Union countries.
Bloomberg News
Enviva, Inc. is the newest corporate bankruptcy to offer an enormous haircut to holders of municipal private activity bonds issued to fund green technology projects.
“During the last 4 to 5 years corporations have financed quite a few green technology manufacturing products utilizing the municipal market,” said David Dubrow, partner at Arentfox Schiff LLP. “Lots of these green corporations have defaulted on their bonds and filed for bankruptcy.”
Enviva, based in Bethesda, Maryland, filed for Chapter 11 reorganization in March within the Eastern District of Virginia, impacting $353 million of municipal bonds as a part of a wider $2.6 billion pot of debt.
Enviva was the obligor for $250 million of municipal bonds issued in Alabama and $100 million issued in Mississippi, each as self-designated “green bonds,” in 2022. They financed plants that produce wood pellets.
Settlement of the bankruptcy discharged the bonds Dec. 6, in keeping with a notice bond trustee Wilmington Trust posted on the Municipal Securities Rulemaking Board’s EMMA bond disclosure website.
Within the case of the Alabama bonds, issued through the Industrial Development Authority of Sumter County, holders of $236.1 million of the debt accepted equity within the reorganized firm; holders of the remaining $13.9 million received a money settlement of 6.68 cents on the dollar.
Holders of all $100 million of bonds issued through the Mississippi Business Finance Corp. accepted equity within the reorganized corporation.
The small payout to Enviva bondholders follows the pattern present in the Chapter 11 bankruptcies of CalPlant, a California company that desired to make fiberboard out of rice straw, and Rialto Bioenergy, a waste-to-energy operator in California.
One other Chapter 11 involving private activity bonds is underway, filed by one other waste-to-energy operation, Fulcrum BioEnergy.
“The Enviva bankruptcy is an example of technology not working at expected capability in consequence of ongoing production problems,” Dubrow said.
“The corporate thereby couldn’t fulfill its contractual commitments to provide its product to its customers,” he said.
“The results of the Enviva bankruptcy can be common,” Dubrow said.
“Bondholders typically have received a couple of cents on the dollar or equity in exchange for his or her debt,” he said.
“Like many project financings with technological or regulatory risks, muni investors often get the short end of the stick,” said Joseph Krist, publisher of Muni Credit News.
“This end result jogs my memory of huge bond issues for medium density fiberboard, manure to methane, ethanol (on the turn of the century) which failed and left muni investors holding the bag,” Krist said.
Many “recycling” deals are brought by operators who don’t have the resources to ride out technical and/operating issues, Krist said.
“The excellent news is that lots of these deals are institutionally owned where there may be a greater appetite for the danger,” he said.
“The muni market has traditionally not done well with deals which involve renewable fuel normally or things that burn particularly,” said John Mousseau, president and CEO of Cumberland Advisors. “If there’s enough equity within the project, we will see where bond investors would have an interest. But with credit spreads tight normally, caution is named for.” Mousseau added that Cumberland didn’t own these forms of bonds.
Enviva is a wood-pellet manufacturer with plants within the Southeast.
In the previous couple of years Enviva promised to deliver more wood pellets that it ended up with the ability to fulfill, sometimes at prices lower than it turned out to cost to fabricate. It reached a deal to make a giant purchase of wood pellets from a German producer with the expectation it could sell them at a profit but then prices went down and these were sold at a loss. Finally, in March 2023 a tornado damaged considered one of its plants.
When Enviva’s 2022 Alabama bonds were issued for its Epes plant, they carried speculative grade rankings of B1 from Moody’s, B-plus from S&P Global Rankings and BB-minus from Fitch Rankings.
U.S. wood pellet production is driven by exports; within the European Union, forestry biomass is viewed as sustainable energy from a regulatory perspective, giving it market benefits.
When Enviva filed for Chapter 11 corporate reorganization bankruptcy in March, it was constructing its largest wood pellet plant in Epes, Alabama, using bond proceeds. It also had plans for an equally productive facility in Bond, Mississippi.
Within the bankruptcy the corporate got an exit loan facility, a delayed draw term loan, and $250 million of recent money financing from existing creditors who advanced the cash in exchange for equity in the corporate. It said it has no near-term debt maturities.
“Enviva is well-positioned for long-term growth and consistent operating performance, allowing the corporate to serve its customers as a market leader and significant partner in meeting their demand for renewable fuel,” the corporate said Dec. 6 after its exit from Chapter 11.
All bondholders have been given a sliver of an organization equity pool, that are like shares which can be expected to be delivered in the long run. The corporate currently has no publicly traded shares. Finally, they got a alternative of either accepting money equal to six.6% of their bond claim or to buy additional equity in Enviva.
Those not selecting the extra money were expected to get a 6.70% or 6.96% recovery.
“Bankruptcies like this put some municipal investors in a bind (mutual funds, e.g.) as many cannot own equities,” Krist said. “I have been in workouts where equity is obtainable instead of or along with money or latest debt however the participating institutional investor doesn’t have the flexibility to carry equity. In case you do not have a house for the equity, it’s hard to simply accept as a substitute of money.
“This deal is complicated by the incontrovertible fact that the equity could be in a non-public company subject to separate disclosure provisions,” Krist said. “The funds don’t need their fixed income analysts effectively picking stocks too…. [Equities] just creates management/compliance issues for funds who don’t need more of them after they have a credit crash.”
Stockholders’ pre-bankruptcy equity was canceled with none compensation.
The tally of green-tech bond failures includes Rialto Bioenergy, a California entity that was a part of the Anaergia company. In May 2023 Rialto filed for Chapter 11 bankruptcy within the U.S. Bankruptcy Court for the Southern District of California.
The filing affected $112 million in outstanding 2019 California Pollution Control Financing Authority solid waste disposal revenue bonds.
Rialto was working to convert food waste into energy. After the sale of the power this yr and dismissal of the bankruptcy, $9.2 million was distributed to bondholders in December, in keeping with a notice filed on EMMA.
CalPlant I LLC sought to create fiberboard from a rice byproduct called rice straw, but its investors got a bankruptcy case as a substitute.
It sold $228 million unrated solid waste disposal revenue bonds issued by the California Pollution Control Financing Authority in 2017. It followed with $73.7 million subordinated bonds from the identical authority in 2019. Finally, it sold $42 million more of senior bonds in 2020.
CalPlant and a holding company filed for Chapter 11 bankruptcy in October 2021 and filed a proposed plan of adjustment in June 2023. The court approved a plan in August 2023 and the bankruptcy was ended that October of that yr. All CalPlant’s assets were liquidated.
The municipal-bond financed Fulcrum BioEnergy filed for Chapter 11 bankruptcy in September.
The firm was created to convert food waste into jet fuel.
Fulcrum entered bankruptcy with six series of municipal bonds totaling $256.7 million. The bonds were used to construct a bioenergy plant and to buy a feedstock processing facility. Nevada Department of Business and Industry was the conduit issuer.
Fulcrum told the court its total liabilities were between $100 million and $500 million.
The bankruptcy is ongoing and no proposed restructuring has been proposed yet.