Wood pellets burn Enviva muni bondholders in bankruptcy

Bloomberg News

Enviva, Inc. is the latest corporate bankruptcy to give a massive haircut to holders of municipal private activity bonds issued to fund green technology projects.

"Over the last four to five years companies have financed numerous green technology manufacturing products utilizing the municipal market," said David Dubrow, partner at Arentfox Schiff LLP. "Many of these green companies have defaulted on their bonds and filed for bankruptcy."

Enviva, based in Bethesda, Maryland, filed for Chapter 11 reorganization in March in the Eastern District of Virginia, impacting $353 million of municipal bonds as 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, both as self-designated "green bonds," in 2022. They financed plants that produce wood pellets.

Settlement of the bankruptcy discharged the bonds Dec. 6, according to a notice bond trustee Wilmington Trust posted on the Municipal Securities Rulemaking Board's EMMA bond disclosure website.

In 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 in the reorganized firm; holders of the remaining $13.9 million received a cash settlement of 6.68 cents on the dollar.

Holders of all $100 million of bonds issued through the Mississippi Business Finance Corp. accepted equity in the reorganized corporation.

The small payout to Enviva bondholders follows the pattern found in the Chapter 11 bankruptcies of CalPlant, a California company that wanted to make fiberboard out of rice straw, and Rialto Bioenergy, a waste-to-energy operator in California.

Another Chapter 11 involving private activity bonds is underway, filed by another waste-to-energy operation, Fulcrum BioEnergy.

"The Enviva bankruptcy is an example of technology not working at expected capacity as a result of ongoing production problems," Dubrow said.

"The company thereby could not fulfill its contractual commitments to supply its product to its customers," he said.
"The result of the Enviva bankruptcy is also common," Dubrow said.

"Bondholders typically have received a few cents on the dollar or equity in exchange for their 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 outcome reminds me of large bond issues for medium density fiberboard, manure to methane, ethanol (at the turn of the century) which failed and left muni investors holding the bag," Krist said.

Many "recycling" deals are brought by operators who do not have the resources to ride out technical and/operating issues, Krist said.

"The good news is that many of these deals are institutionally owned where there is a greater appetite for the risk," he said.

"The muni market has traditionally not done well with deals which involve renewable fuel in general or things that burn in particular," said John Mousseau, president and CEO of Cumberland Advisors. "If there's enough equity in the project, we can see where bond investors would be interested. But with credit spreads tight in general, caution is called for." Mousseau added that Cumberland didn't own these sorts of bonds.

Enviva is a wood-pellet manufacturer with plants in the Southeast.

In the last few years Enviva promised to deliver more wood pellets that it ended up being able to fulfill, sometimes at prices lower than it turned out to cost to manufacture. It reached a deal to make a big 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 one of its plants.

When Enviva's 2022 Alabama bonds were issued for its Epes plant, they carried speculative grade ratings of B1 from Moody's, B-plus from S&P Global Ratings and BB-minus from Fitch Ratings.

U.S. wood pellet production is driven by exports; in the European Union, forestry biomass is viewed as sustainable energy from a regulatory perspective, giving it market advantages.

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.

In the bankruptcy the company got an exit loan facility, a delayed draw term loan, and $250 million of new money financing from existing creditors who advanced the money in exchange for equity in the company. It said it has no near-term debt maturities.

"Enviva is well-positioned for long-term growth and consistent operating performance, allowing the company to serve its customers as a market leader and critical partner in meeting their demand for renewable fuel," the company said Dec. 6 after its exit from Chapter 11.

All bondholders have been given a sliver of a company equity pool, which are like shares that are expected to be delivered in the future. The company currently has no publicly traded shares. Finally, they were given a choice of either accepting cash equal to 6.6% of their bond claim or to purchase additional equity in Enviva.

Those not choosing the additional cash 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've been in workouts where equity is offered in place of or in addition to cash or new debt but the participating institutional investor does not have the ability to hold equity. If you don't have a home for the equity, it's hard to accept instead of cash.

"This deal is complicated by the fact that the equity would be in a non-public company subject to separate disclosure provisions," Krist said. "The funds don't want their fixed income analysts effectively picking stocks too…. [Equities] just creates management/compliance issues for funds who don't need more of them when they have a credit crash."

Stockholders' pre-bankruptcy equity was canceled without any compensation.

The tally of green-tech bond failures includes Rialto Bioenergy, a California entity that was part of the Anaergia company. In May 2023 Rialto filed for Chapter 11 bankruptcy in 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 facility this year and dismissal of the bankruptcy, $9.2 million was distributed to bondholders in December, according to 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 instead.

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 same 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 year. 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 build a bioenergy plant and to purchase 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.