Wood pellet firm's tax-exempt bonds tumble with its stock price

BY SourceMedia | MUNICIPAL | 11/15/23 02:24 PM EST By Thomas Nocera

The company responsible for meeting obligations on $250 million of green bonds issued in Alabama in 2022 may not be able to do so by December, it said in a recent disclosure filing.

The Industrial Development Authority of Sumter County issued the exempt facilities revenue bonds to bankroll a production plant for wood pellet maker Enviva (EVA), which hoped to expand production amid favorable pricing conditions and booming demand for its product.

Proceeds were loaned to the company under a loan and guaranty agreement constituting a senior unsecured obligation.

The wood pellet industry is driven by foreign demand, largely in Europe where they receive government support as a "green" alternative to fossil fuels.

Enviva (EVA), which was founded in 2004, went public in 2015 and currently manages nine pellet plants located across six states of in the U.S. Southeast. The Alabama bonds were issued to fund a new facility in Epes, Alabama.

Secondary market prices for the bonds have plummeted, following the downward spiral of the company's stock as the company reports increasing losses and turnover in the executive suite.

Friday, Moody's Investors Service (MCO) dropped the rating on Enviva's (EVA) Alabama bonds and a separate $100 million Mississippi Business Finance Corp. exempt issue to
Caa2 from B3 and placed the ratings under review for further downgrade.

"Governance was a key driver of this rating action, reflecting the lack of transparency with regard to business practices of the prior management regarding the extent of trading in wood pellets beyond the supply of wood pellets under long-term take or pay contracts," Moody's said. "These practices indicate a higher level of risk in the business profile than was incorporated into the prior ratings."

The Sumter County IDA bonds, priced in June 2022, were sold with speculative ratings of B1 from Moody's, B-plus from S&P Global Ratings, and BB-minus from Fitch Ratings, and a 6% coupon.

They were "self-designated' as green bonds, with no third-party verification.

Secondary market pricing on the single maturity, with a mandatory tender in 2032, began slipping in May to around 70 cents on the dollar before crashing after the company's Nov. 9 earnings release to between 31 and 41 cents on the dollar, according to trade data posted on the Municipal Securities Rulemaking Board's EMMA website.

Enviva's (EVA) stock price, which topped $51 a share in January, fell below $1 when the third-quarter results were announced, and traded at $1.23 Wednesday.

That 10-Q report reported net losses of $85.2 million for the third quarter of 2023, compared to $18.3 million for the same period in 2022, on net revenue of $320.6 million.

In that release, the company announced "a comprehensive review of its capital structure" and the appointment of Glenn Nunziata, the chief financial officer, as interim chief executive officer, replacing Thomas Meth, who remains as president.

Marketplace fluctuations continued to make contracts hammered out last year far less profitable than intended, the company said.

Prices for wood pellets decreased 17% year-over-year, meaning contracts negotiated in 2022 running through 2026 were having "a significant negative impact" on Enviva (EVA) profitability, cash flows, and liquidity, the company said.

Without significant price increases for wood pellets, the company said it expected 2022's transactions to continue to weigh on its finances.

"The company anticipates that absent a cure, it may be in breach of certain of its covenants under its senior secured credit facility as early as the reporting date for the measurement period ending December 31, 2023," it said. "These conditions and events in the aggregate raise substantial doubt regarding the Company's ability to continue as a going concern."

Lisa Washburn, managing director at Municipal Market Analytics, said that while the company met its obligations through September, the potential breach of covenants in December was no small worry.

"If that were to happen, that could trigger an event of default under their senior lending facility, which could result in them in the ledger accelerating the debt, which would mean that they couldn't pay their obligations," she said. "That they've hired financial and legal advisors to help them through to figure out what their options are really doesn't paint a very optimistic picture for the company at the current time."

Enviva (EVA) said it was engaging several financial firms including Lazard (LAZ), Alvarez & Marsal, and Vinson & Elkins in a comprehensive review of alternatives to enhance its capital structure, including debt.

The company reported $1.8 billion of long-term debt and finance lease obligations in its third-quarter report, including the two tax-exempt bond issues.

Potential fallout could be severe if senior lenders decide to exercise contractual remedies, Washburn said, and the 10-Q was written to prepare investors for a number of potential outcomes.

Enviva (EVA) weighed several alternatives in its plans.

That included negotiating with existing wood pellet suppliers and customers to restructure the terms of 2022 transactions; seeking alternatives to mitigate the potential impact of those transactions on liquidity; and renegotiating to improve Enviva's (EVA) profitability and to better protect against inflation and other cost risks.

"Enviva (EVA) is prioritizing high-quality, long-term contracted relationships with the intention of returning to a business model of primary cash flow generation from predictable, profitable take-or-pay contracts," the company said. "Continuing to advance cost-reduction and productivity initiatives designed to improve the financial and operating performance of the company's fully contracted assets."

The company reported its liquidity to $440.7 million as of September 30, 2023, including $315.2 million unrestricted cash and $125.5 million cash restricted to funding a portion of the costs of the acquisition, construction, equipping, and financing of its plants in Epes.

It's been less than five months since the ceremonial groundbreaking ceremony for that plant, attended by Alabama Gov. Kay Ivey.

"The fact that the world's largest wood pellet producer is building its largest production facility to date here, in Sweet Home Alabama, is yet another testament to our nation-leading business climate and world-class workforce," she said at the June 28 event.

Enviva's (EVA) ratings are down across the board.

Fitch Ratings on Monday downgraded Enviva's (EVA) long-term issuer default rating to CCC-minus from B-plus and placed it on rating watch negative.

"Fitch believes a default of some kind is probable in the coming months," it wrote.

S&P last week downgraded the company four notches to CCC-minus from B based on an elevated risk of default. The outlook was placed at negative.

The wood pellet industry has not exactly been a paragon of stability, with bankruptcies impacting municipal bond-financed projects in South Carolina and Louisiana.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.