💥New Chapter 11 Bankruptcy Filing - Enviva Inc. ($EVA)💥
Wood pellet manufacturer files, seeking to negotiate take-or-pay contracts under an RSA
On March 12, 2024, MD-based Enviva Inc. ($EVA) and 20 affiliates (collectively, the “debtors”) filed chapter 11 bankruptcy cases in the Eastern District of Virginia (Judge Kenney). Wait, what? Virginia is back? Did these guys not have time to set up a sham LLC in New Jersey in the lead-up to filing? We mean … we discussed EVA back in mid-November in:
And, yes, that title did, in fact, refer to EVA. Surely four months is plenty of time to manufacture venue, guys, right?
Anyways, the debtors’ business is fairly straightforward. EVA procures wood fiber from mainly the southeastern United States and funnels these fibers through a process that mills, dries, and molds them into wood pellets. Most of these pellets are then sold to biomass powerplant customers located in the UK, the EU, and Japan through long-term, take-or-pay offtake contracts. The debtors accomplish all of this through 10 owned and operated pellet production plants and 6 owned or leased deep-water marine terminals. As of December 31, 2023, the total weighted-average remaining term of the debtors’ offtake contracts was ~13.7 years.
In many jurisdictions, wood pellets are considered a “green” alternative to coal for power generation. This can be controversial when the process involves the felling of trees … you can read more about this in our previous coverage. But, regardless, demand for wood pellet is strong: it’s easy to convert coal-fired plants to biomass-fired. And regulation on the emissions of greenhouse gases (eg. EU’s Emissions Trading System) have pushed the need for wood pellet.
Demand was so strong that the debtors historically bit off more than they could chew in their long-term take-or-pay contracts and consistently failed in providing the required amount of wood pellets. The solution? Shore up the balance from the spot market! This works when the wood pellet spot market is lower than the purchase price in the off-take contracts, but falls apart spectacularly when the spot market is higher. Basically, the debtors had an artificial short position on wood pellet prices.
Unfortunately, wood pellet prices reached an all-time high in ‘22. The debtors could no longer comfortably/affordably fill their short positions through the spot market and, freaking out, decided to enter into a series of transactions (the “Q4 2022 Transactions”) with long time customer and counterparty, RWE Supply & Trading GmbH (“RWEST”), to secure a large amount of wood pellets to cover future shortages through a long-term fixed-price contract. The debtors ended up negotiated a price higher than historical average prices due to the elevated prices at the time and even higher than sales prices under pre-existing sales contracts, but management was not worried. After all, there was no way prices would drop.
Spoiler alert. They dropped, less than a year after in ‘23.
To think the debtors could’ve avoided all this with some hedging.
Add on increasing inflation and we’re sure the debtors wish they could forget the entire year of ‘23.
If you were a shareholder, you’re probably pretty at the Q4 2022 Transactions, and rightfully so! Thus, the board of directors initiated an independent investigation into the issue in early November 2023. Apparently the board was (rightfully) p*ssed that it was not disclosed to the RWEST transactions. Baker Botts LLP is currently conducting the investigation.
Major shareholders here include Riverstone Holdings LLC (“Riverstone”):
As these issues accumulated, the debtors started to look for ways to bolster their liquidity including a $105mm term loan in January ‘23 from existing lenders, a $250mm PIPE with their two largest shareholders in March ‘23, and cost-cutting measures through ‘23.
By June ‘23, the debtors enlisted the help of Alvarez & Marsal LLC as financial advisor. Vinson & Elkins LLP became the company’s restructuring counsel in August ‘23 and Lazard Frères & Co. ($LAZ) joined the fun in October ‘23.
By fall of ‘23, the company entered negotiations with RWEST, resulting in a series of standstill agreements. However, RWEST issued two termination notices on January 16, 2024 meaning that $348.7mm in early termination payments became due. After a brief extension, the payment became due on February 15, 2024. The debtors did not pay and on February 16, 2024, RWEST issued a letter demanding the overdue amounts.
During the same time period, the debtors also began negotiations regarding existing long-term contracts with the goal of raising the purchase price on certain of these contracts and, otherwise, walking away from out-of-the-money contracts without additional costs.
Outside of the RWEST contracts, see below for the cap structure of the debtors’ $1.8b of total funded debt. EVA clocks in as the fourth largest case to file in ‘24 so far (behind Gol, Audacy, and ConvergeOne):
In November ‘23, an Ad Hoc Group formed with Davis Polk & Wardwell LLP and Evercore Group LLC ($EVR) as advisors. Initially, the Ad Hoc Group consisted of holders of primarily the ‘26 Notes but by the petition date, the group included ~95% of the outstanding principal amount of the 2026 Notes, ~72% of the debtors’ outstanding debt under the senior secured credit facility, ~78% of the aggregate outstanding principal amount of the Epes Green Bonds, and ~45% of the aggregate outstanding principal amount of the Bond Green Bonds.
On January 15, 2024, the debtors skipped semi-annual interest payments under the ‘26 Notes. During the 30-day grace period, the debtors received an in-court transaction proposal from the Ad Hoc Group. The Ad Hoc Group proposal included a $500mm DIP facility split into two $250mm tranches, administered in up to five draws, and of which $100mm can be syndicated by the company (backstopped by the Ad Hoc Group).* The DIP is secured by first liens on unencumbered assets and a second-priority junior lien on the senior secured credit facility collateral package; it carries a SOFR+8% interest rate, a 3% backstop fee, a 4% OID upfront fee, and a 3% exit fee.
Two months later, on March 12th, the debtors entered into a restructuring support agreement (“RSA”) with the Ad Hoc Group, which finally brings us to the petition date.
The plan under the RSA contemplates a $750mm 1L exit facility which will serve to pay the senior credit facility (revolver+TL), unless holders of the revolver/TL decide to exercise their rights to participate in the exit facility and roll over their existing debt.
Tranche A of the DIP has the option to be equitized into reorganized Enviva while tranche B will be repaid in cash from a $250mm equity rights offering (“ERO”).
Holders of the ‘26 Notes, the Epes Green Bonds, the Bond Green Bonds, and GUCs will receive their pro rata share in reorganized Enviva equity. This is subject to dilution from the Tranche A equitization and the ERO. However, these parties (excluding holdco GUCs) also have the option to participate in the ERO.
Existing equity holders will receive 5% of reorganized Enviva equity and warrants with a 5 year term for 5% of reorganized Enviva equity.
On March 25, 2024, the US Trustee appointed an official committee of unsecured creditors (the “UCC”) that included RWEST, Drax Power Limited, and Ryder Integrated Logistics. Proposed counsel to the UCC is Akin Gump Strauss Hauer & Feld LLP. The ‘26 Notes trustee, Wilmington Savings Fund Society FSB, was up in arms for the apparent lack of inclusion and expressed its discontent through a motion to reconstitute the UCC. Wilmington Savings Fund is joined in support by the debtors (mostly due to concerns about the appointment of competitors RWEST and Drax) and the Epes green bonds’ trustee, Wilmington Trust NA.
Wilmington be like “wtf? we represent the majority of the unsecured debt.”
The US Trustee is probably like “but you’ve participated in the RSA.”
And Wilmington in response be like “Noooo. Technically the noteholders signed the RSA, we’re just the trustee. And what about the 5% that didn’t sign the RSA? We speak for all 2026 noteholders.”
A hearing for the reconstitution motion is set for May 9, 2024.
And that’s not the only issue up for the May 9th hearing. Recall that Riverstone is a major equity holder in Enviva and that Vinson & Elkins is the debtors’ proposed counsel. Well, it turns out V&E also represented Riverstone previously and several current/former directors. Of course, the UST is screaming conflict of interest and filed an objection to K&E’s retention application. UST on debtors’ counsel violence!
There’s no plan on the docket yet and the debtors have 120 days after the petition date to draft one up along with a disclosure statement. The confirmation deadline is set for 185 days after the petition date, meaning this is going to be a rather long process. The debtors have got a looooooooot of contracts to renegotiate.
The debtors are represented by Vinson & Elkins LLP (David Meyer, Jessica Peet, Matthew Pyeatt, Trevor Spears) and Kutak Rock LLP (Michael Condoyles, Peter Barrett, Jeremy Williams) as legal counsel, Alvarez & Marsal LLC (Mark Rajcevich) as financial advisor, and Lazard Fréres & Co (George Bilicic) as investment banker. The Ad Hoc Group is represented by Davis Polk & Wardwell LLP (Damian Schaible, David Schiff, Hailey Klabo) and McGuire Woods LLP (Dione Hayes, Elizabeth Sieg, Connor Symons) as legal counsel, and Evercore Group LLC as financial advisor.
*The $100mm syndicated portion of the DIP completed on April 8, 2024.
Company Professionals:
Legal: Vinson & Elkins LLP (David Meyer, Jessica Peet, Matthew Pyeatt, Trevor Spears) and Kutak Rock LLP (Michael Condoyles, Peter Barrett, Jeremy Williams)
Special Committee of the Board: Janet Wong, Gary Whitlock, Martin Davidson, Gerrity Lansing
Legal: Baker Botts LLP (James Prince, Travis McRoberts, Kevin Chiu, Shelby Saxon)
Financial Advisor: Alvarez & Marsal LLC (Mark Rajcevich)
Investment Banker: Lazard Fréres & Co. (George Bilicic)
Claims Agent: KCC (Click here for free docket access)
Other Parties in Interest:
Senior Secured Credit Facility Agent: Ankura Trust Company LLC
Legal: Cahill Gordon & Reindel LLP (Joel Moss, Jordan Wishnew) and Hunton Andrews Kurth LLP (Jason Harbour, Henry Long)
‘26 Notes Trustee: Wilmington Savings Fund Society FSB
Legal: Kilpatrick Townsend & Stockton LLP (Todd Meyers, Gianfranco Finizio) and Thompson McMullan PC (David Ruby, William Prince IV)
Bond Green Bonds and Epes Green Bonds Trustee: Wilmington Trust NA
Legal: Kramer Levin Naftalis & Frankel LLP (Amy Caton, Douglas Buckley) and Greenberg Traurig LLP (Thomas McKee, Warren Bloom, Peter Kieselbach)
Financial Advisor: Perella Weinberg Partners LLP
Ad Hoc Group
Legal: Davis Polk & Wardwell LLP (Damian Schaible, David Schiff, Hailey Klabo) and McGuire Woods LLP (Dione Hayes, Elizabeth Sieg, Connor Symons)
Financial Advisor: Evercore Group LLC
DIP Agent: Seaport Loan Products LLC and Acquiom Agency Services LLC
Legal: McDermott Will & Emery LLP (Jennifer Routh, Jonathan Levine, Lucas Barrett)
RWE Supply & Trading GmbH (Lisa Laukitis, Peter Newman, Elizabeth Downing)
Legal: Skadden, Arps, Slate, Meagher & Flom LLP (Lisa Laukitis, Peter Newman, Elizabeth Downing) and Williams Mullen (Michael Mueller, Jennifer McLemore, Gabrielle Brill)
Financial Advisor: Houlihan Lokey Capital Inc
Official Committee of Unsecured Creditors (Dkt. 173): RWE Supply & Trading GmbH, Drax Power Limited, Ryder Integrated Logistics
Legal: Akin Gump Strauss Hauer & Feld LLP (Ira Dizengoff, Abid Qureshi, Jason Rubin, Scott Alberino, Alexander Antypas, Avi Luft, Christopher Gessner, David Giller)
Financial Advisor: AlixPartners
Investment Banker: Ducera Partners