Plastic recycling company's Ohio plant is on track after default designation

A plastics recycling plant in Ohio that company officials promise will "change the landscape of recycling" has launched initial operations after years of construction delays that triggered a bond default designation.

"This is the moment we've been working toward for the last decade," PureCycle Technologies LLC CEO Dustin Olson said Wednesday during a second-quarter earnings call. "The first plant is always the most challenging and the most special. With this progress, we can now start realizing PureCycle's potential."

Despite the construction delays and a dispute with the contractor that put a mechanic's lien on the property — another potential violation of the bond agreement — PureCycle is now looking to raise more long-term financing as part of a "global expansion plan" that includes facilities in Augusta, Georgia as well as Antwerp, Belgium, and South Korea.

PureCycle Technologies

Florida-based PureCycle touts itself as a groundbreaker in the plastics recycling market, using technology that it licensed from The Proctor & Gamble Company to recycle waste polypropylene, a common plastic that makes up 28% of the world's plastic but has recycling rates of less than 1%, according to a November 2020 company presentation. The patented recycling process separates color, odor and contaminants from the plastic waste and transforms it into an "ultra-pure" resin pellets that are "suitable for high-value, food grade consumer products."

The company is one of many trying to solve the growing problem of unrecycled plastics. Global plastic production is expected to triple by 2060, according to the Organization for Economic Cooperation and Development, with only about 17% of that being successfully recycled by that time. As of 2019, only 9% of plastic waste was recycled, with incineration and landfill accounting for around 20% and 50% of the waste respectively, according to the OECD.

The Southern Ohio Port Authority in late 2020 came to market with $250 million of unrated debt for the PureCycle project at a time when interest rates were low and investors hungry for yield looked to riskier, speculative projects. In October 2020, as the yield on the 30-year AAA bond hovered around 1.75%, PureCycle's debt featured coupons of 7%, 10% and 13%.

The bonds were sold only to qualified investors in minimum $100,000 denominations and are exempt from Rule 15c2-12 disclosure mandates.

"These projects with speculative technology have historically been much riskier than other bonds in the municipal bond market," said Dan Solender, partner and director at Lord Abbett, which does not own any of the debt.

Nuveen holds the paper in a few of its municipal mutual funds, including in its High Yield Municipal Bond Fund, which has $42.3 million of the senior 7% bonds that are marked at a value of $31.7 million. The firm did not make anyone available for comment.

For two years after issuance, the bonds traded at or above par but began to fall in mid-2022 as delays became clear. The 7% senior bonds due in 2042 most recently traded in April for 74.25 with a 9.988% yield. The 13% subordinate taxable bonds due in 2027 and 10% subordinate tax-exempt bonds also due in 2027 have not traded since last year.

A few months after the 2020 bond financing, PureCycle went public to generate additional equity via a special purpose acquisition company, at a time when SPAC activity peaked.

The company blamed construction holdups on everything from COVID-19 to the Russia-Ukraine war to low water levels in the Mississippi. PureCycle's problems were "emblematic" of construction delay risk that afflicted many projects during this period, said Moody's Investors Service in a January 2023 commentary. Noting supply chain and other challenges, Moody's said PureCycle's problems illustrate how startup projects can face "another area of credit pressure."

The company tapped capitalized interest and debt service accounts to cover bond payments, but the failure to complete the Ohio plant by December 2022 as required by the bond agreement triggered a designated default notice.

Bond trustee UMB Bank NA noted in a Dec. 1 notice to bondholders that a designated default had occurred and, if left uncured, would become a formal event of default.

That would have likely triggered penalties like accelerated payments or higher interest rates, but exact terms are not known because the offering documents are not public.

In March, the parties reached a deal. Among other terms, bondholders agreed to waive the event of default if the company raised at least $150 million of working capital to support the Ironton facility, replenished various bond accounts, and hit a series of milestones by target dates.

Milestones included "mechanical completion" of the Ironton plant by June 30, 2023, and full completion of the facility by Dec. 31, 2023, as well as production and performance targets like producing 107 million pounds of pellets a year by next year.  

The company achieved the mechanical completion target in April, and in June produced pellets for the first time, officials said during last week's earnings call. The facility is now "operational," according to Olson.

"After achieving the first two bondholder milestones in the second quarter, we expect to achieve our next milestone" of operating at 50% capacity for a month — producing 4.45 million pounds of resin — by the end of September, he said.

Now that Ironton is operational, the company is focused on raising long-term financing for the construction of a second plant in Georgia, said Larry Somma, PureCycle's CFO.

The company has been working with the Augusta Economic Development Authority on a payment-in-lieu-of-taxes financing but is not expected to issue revenue bonds through the authority for construction of the plant, instead seeking long-term financing through a private deal, according to Cal Wray, the authority's president.

The company in its quarterly update said it is targeting Augusta site development and construction activities to begin in the fourth quarter of 2023.

Olson said during the company's March earnings call that he is "thankful" to bondholders for agreeing to a revised timeline.

"Whenever you have a new technology like this you have to get it started, see how it operates and then see where the constraints are," he said. "This has been a tremendously challenging period of time through which we have moved on, and we are ready to bring recycling to the world."