Enviva Restructuring, Getting Burned Selling Pellets

Welcome to the 121st Pari Passu Newsletter,

Today we are learning about a counterintuitive example of Chapter 11. When people think about the most common cause of a distressed business, there’s a good chance they might say a decline in demand for goods and services. Whether a macroeconomic event or overleveraging plays a part, a restructuring often arises as the result of a mismatch between management’s expectations and reality. 

The case of Enviva is the opposite. It was Enviva’s attempts to meet the soaring demand for its products that caused the company to go under. This report details Enviva’s rapid growth, causes of distress, and the fatal mistake that led to its Chapter 11 bankruptcy last year.

But First, a Message from BetterPitch

Enviva Overview

Enviva, Inc. was the world’s largest producer of industrial wood pellets, a renewable substitute for coal in power generation. The company was founded in 2004, and IPO-ed in 2015 under the EVA ticker on the New York Stock Exchange, valuing the company at north of $400mm. Enviva currently owns and operates 10 wood pellet production plants located across the southeastern United States. The company has also been developing two more plants: One in Epes, Alabama, and the other near Bond, Mississippi (we’ll return to this later) [1].

Enviva sources wood residuals from hundreds of timber industry participants in the southeastern United States. The company then processes the wood fiber into pellets and ships them internationally from 6 deep-water marine terminals located near its production facilities. Enviva’s terminals act as port facilities, providing direct deep-water access to large cargo ships, while also allowing the company to store large quantities of ready-to-ship pellets. Much of Enviva’s demand comes from large biomass facilities in the E.U., U.K., and Japan, as the wood pellets meet the criteria put forth by the European Union’s Renewable Energy Directive (“RED III”). Enviva’s wood pellets are viewed as a practical and renewable “drop-in” alternative to coal because of their similar attributes [1]. 

Financial History

Growth

Enviva has operated successfully under long-term, take-or-pay contracts with customers, which require Enviva’s customers to pay for the contracted shipments, regardless of whether they can accept the shipment. The average contract had approximately 12 years remaining as of August 2024 [1]. The company grew its top-line revenue by 15% annually from 2016 to 2023 and generated $1.22bn in FY 2023 revenue. Enviva operated at a slim margin, with gross margin hovering around 20% each year, and posted either marginal net gains or losses. Regardless, a growing topline and increase in demand for renewable energy was enough to send Enviva’s share price soaring, nearly quadrupling over the 7 years following the IPO [2]. 

Financing Aggressive Expansion

To keep up with increasing demand, Enviva opened 10 production facilities over the course of 12 years. Excluding the ~$200mm in proceeds from Enviva’s IPO, much of these capital expenditures were funded via the issuance of new debt. Enviva reported debt of $433mm in 2016, which grew quickly to $1.09bn in 2020. Over the same period, Enviva was able to keep up with its growing debt burden, more than doubling adjusted EBITDA from $83mm to $190mm and maintaining a leverage ratio of roughly 5x [2].

In the following years, it seems that Enviva bit off a little bit more than it could chew. In December 2019 and July 2020, Enviva issued new senior 6.5% unsecured notes worth $750mm due 2026 (the “2026 notes”). In July 2022, Enviva issued $250mm worth of tax-exempt green bonds for the construction of the Epes plant (the “Epes Green Bonds”). The company also issued $100mm of the same type of bonds for the construction of the Bond, MS facility (the “Bond Green Bonds”). These 3 securities made up the bulk of unsecured claims during Enviva’s 2024 Chapter 11 filing [1]. 

In 2021 and 2022, increasing costs for raw materials, labor, and shipping shrunk Enviva’s Adj. EBITDA margin from $190mm in FY 2020 to $117mm and $155mm in FY 2021 and FY 2022, respectively. These shrinking margins, coupled with Enviva’s financing for their new facilities, caused the company’s leverage to balloon to over 10x Adj EBITDA [2]. Total debt reached  $1.6bn in 2022 and Enviva was footing an interest expense of $72mm, which may not seem like much for a $5bn+ company, but Enviva’s slim margins and poor decision-making would turn this into a catalyst for distress. 

Causes of Distress

Ultimately, it was a series of unfortunate events – and poor decisions – that derailed Enviva’s growth and plunged them into a default and Chapter 11. These factors can be boiled down into global/environmental events, overleveraging, and poor decision-making within the wood pellet spot market. These 3 causes worked in tandem to nearly incinerate Enviva’s ability to operate as a going concern. Therefore, rather than separately addressing each cause, it’s best we approach Enviva’s distress as the chain reaction it was.

Let’s rewind back to 2022 – an era of rapid inflation, supply chain disruptions, and the beginning of the Russia-Ukraine war. Enviva was facing significant increases in operational costs. The price for wood residuals was at an all-time high, and demurrage costs associated with loading, transporting, and unloading wood pellet shipments stemmed from port congestions in Europe and Asia. To clarify, Demurrage fees must be paid when cargo remains at a port or terminal for longer than the agreed time outlined in a shipping contract. Enviva engaged in 2 types of shipping agreements: Cost, Insurance, and Freight (CIF) and Free on Board (FOB). CIF contracts require Enviva to cover all expenses and risks associated with the shipping of its wood pellets until they arrive at the destination. On the other hand, FOB contracts pass ownership to the customer once the pellets are loaded onto the ship. Because Enviva primarily engaged in CIF contracts, the company was often footing the costs associated with supply chain delays [1][4]. 

Additionally, the war in Ukraine caused an immediate surge in energy prices, due to the unavailability of Russian natural gas, which rippled throughout Enviva’s cost structure. This lack of natural gas initially caused the demand for wood pellets to surge, as biomass plants began stockpiling the pellets. Towards the end of the year, as Europe began to diversify their energy sources, cut back on wood pellet subsidies, and use up the pellets they had stockpiled, European demand for Enviva’s wood pellets fell. Enviva sold roughly 8% fewer wood pellets in 2022 than in 2021, in terms of metric tons. 

Enviva also cites the Omicron variant of COVID-19 as another significant hit to its profitability. In early 2022, high infection rates among plant workers caused significant disruptions to production as workers quarantined at home. The company also dealt with increased levels of employee turnover, which significantly increased wage costs, as the company began relying on temporary labor to fill their factories. All-in-all, Enviva estimated a $14mm hit to its FY 2022 income statement from COVID-19 [4]. Again, this may not seem like much for a company with $1bn+ in revenue, but with 2022 gross profit of just $54mm, the $14mm hit became substantial. Enviva’s 2022 gross margin dropped to 4.9%, compared to 12.2% in 2020 [4]. Because Enviva was locked into long-term contracts at fixed prices, the company was unable to pass these cost increases onto customers, which is why Enviva saw such a drastic compression in margins. 

2022 was certainly not Enviva’s year. The company sold around 8% fewer wood pellets than the prior year while footing more costs from inflation and global events (if you’re wondering how 2022 revenue still increased despite fewer sales, we’ll examine that in a second). Enviva also had to manage the massive debt burden they had taken on from the rapid expansion of production facilities (interest expense of $62mm was larger than gross profit). At this point, the only thing keeping Enviva afloat was the $333mm they raised through a follow-on offering, which also spooked shareholders and marked the beginning of the end for their share price [1]. All of this set the stage for what would be the final nail in Enviva’s coffin: The company’s mistakes in the spot market, and specifically, the “Q4 2022 Transactions.”

Wood Pellet Spot Market

It’s important to start by explaining the spot market for wood pellets. For any commodity, the spot market enables the buying and selling of commodities for immediate delivery. Unlike futures, which involve delivery at a later date for an agreed-upon price, the spot market solely reflects the supply and demand of the current market. 

Originally, Enviva’s business model did not involve buying or selling on the spot market, as they were engaged in large, long-term contracts with international customers. However, as wood pellets became increasingly popular as an alternative energy source, the company locked itself into a substantial number of long-term contracts, many of which had extremely large delivery requirements. Despite Enviva’s efforts to expand production capacity, the company remained short of meeting its contracted demand from production alone. To make up for shortfalls in pellet production, Enviva began buying wood pellets from the spot market and reselling them to contract customers in order to fill the difference between delivery requirements and factory production. This move allowed Enviva to continue growing topline revenue while aiming to play catch-up with production capacity [1]. 

At first, this spot market strategy proved effective for Enviva, helping the company nearly double its revenue in 5 years while meeting contractual demands. The issue is that this strategy’s profitability was entirely dependent upon spot market prices, which are quite volatile. This oversight caught up to Enviva in 2022 when the Russia-Ukraine war caused spot prices to soar. The company could no longer afford to fill its contractual demand via the spot market [1]. 

With spot prices at an all-time high and Enviva’s production capabilities hindered by the factors we outlined above, the company needed to find another way to stay afloat. Enviva began deferring or canceling contractual shipments to sell the pellets at the higher spot market prices. While this was profitable in the short term, Enviva had to make some significant concessions, which involved paying cancellation fees or selling future pellets at a large discount. These fees amounted to a whopping $141mm [1]. 

Q4 2022 Transactions

Towards the end of 2022, Enviva made a bold, unhedged attempt to cover its losses. The company entered a series of transactions with RWE Supply & Trading GmbH (“RWEST”), a longtime contractual customer of Enviva. Enviva’s plan was to sell RWEST a large amount of wood pellets at the very elevated spot market price but then buy back an even larger number of pellets at a future date. The agreed-upon price for the futures contract was lower than current spot market prices but well above historical prices. This transaction was essentially a bet that spot market prices would stay elevated. Enviva’s goal was to generate enough cash to make up for its shrinking margins in 2022 and to fill its future contracted demand shortages at a price cheaper than the current spot market prices. Enviva also did not hedge this contract in any way, so once European demand fizzled out and 2023 spot market prices fell, Enviva was left holding a massive unrealized loss ($156.9mm in 2023 alone, to be exact). Enviva was also on the hook for another $140mm over the next two years [5]. In September of 2023, to avoid executing on the unprofitable part of the contract, Enviva entered into a standstill agreement with RWEST. Simply put, a standstill agreement is a temporary pause in legal or financial actions between two parties. In the context of bankruptcy or financial distress, it often involves creditors agreeing not to seize assets, demand repayment, or force a default, while the debtor works on a restructuring plan. In Enviva’s case, RWEST agreed not to exercise its financial or legal rights under the original agreement. This agreement expired on December 31, 2023, and  RWEST would end up claiming a $350mm termination fee, which would be treated as a general unsecured claim [1].

The impact of this transaction on Enviva’s 2023 financials was catastrophic. In March of 2023, Enviva revealed to investors that the company was expecting to lose nearly 5 times more than previously expected while also cutting its dividend, which caused Enviva’s stock to fall 67% on that day alone [5]. For FY2023, Enviva reported an astonishing $685.5mm net loss, $361.5mm of which was attributable to the Q4 2022 transactions. The breakdown below details the total impact of the transactions on Enviva’s income statement [4]. 

Turnaround Attempts

Following the disastrous effects of the Q4 2022 transactions, Enviva made a few last-ditch efforts to manage liquidity. The first of which was in January of 2023, when the company closed on a term loan, worth $105mm, from its current Senior Secured Credit Facility lenders. They also raised another $250mm through a PIPE (private investment in public equity) while Enviva’s share price was still trading at high levels. Lastly, in September of 2023, the company drew down the remaining $246.5mm from its revolving credit facility [1]. The above transactions helped Enviva raise a total of $601.5mm to fund operations and left Enviva with a $315mm cash balance following the September draw [4]. These external funds would help the company stay afloat until its Chapter 11 filing in March of 2024. 

In Q3 2023, Enviva retained Alvarez & Marshal, Lazard, and Vinson & Elkins LLP to forecast cash flow and begin exploring out-of-court restructuring solutions. The company’s advisors concluded that if EBITDA and gross margin could be improved in the near term, the company would have runway for a turnaround and a new capital raise. There were two primary ways the company sought to accomplish this. The first was by renegotiating current long-term contracts to provide better pricing for Enviva. The second involved securing additional bridge financing from current creditors. Enviva ended up successfully renegotiating around 25% of its long-term contracts [1]. However, this would not be enough to raise EBITDA or convince creditors to provide additional financing, and Enviva began preparing for in-court restructuring solutions. While Enviva didn’t have a major upcoming maturity until 2026, if the company didn’t find new liquidity soon, it’d be forced to file.

Over Enviva’s 18 months of distress, its slim margins resulted in substantial cash burn - $50-$100mm per month in H2 2023 - from operations and capital expenditures, but Enviva was still able to operate as it continuously brought in outside cash from debt issuances and new equity investments. This changed when the company was unable to effectuate a turnaround and did not hit the EBITDA benchmark required by creditors. To be specific, 2023 Adjusted EBITDA was -$119mm. This was a clear signal to creditors that Enviva would not be able to service its outstanding debt ($100mm of annual cash interest payments), let alone any new debt. In Q3 2023, after the various financings, Enviva reported cash of $315mm. Creditors would refuse to lend any additional money, and Enviva had already drawn down its entire revolver. By the end of 2023, Enviva’s cash balance was down to $177mm, and at this rate, the company would run out of cash in Q2 2024 [4]. Because of this liquidity crunch in early 2024, Enviva would not be able to pay the cash interest on its 2026 notes, essentially forcing the company into an in-court restructuring. 

Chapter 11 Bankruptcy

On January 15, 2024, Enviva’s board of directors voted to skip the required $24.4mm semi-annual interest payment on the 2026 notes with the goal of preserving liquidity. The notes came with a 30-day grace period to remedy the missed payment before an “event of default” would occur. This allowed Enviva to make any last-ditch efforts at an out-of-court restructuring. When the grace period ended on February 15, Enviva entered into a forbearance agreement with creditors. The forbearance agreement was a contract in which Enviva’s creditors agreed to temporarily not exercise their rights outlined in the credit docs, meaning they couldn’t force Enviva into an event of default. ]. The forbearance agreements terminated on March 12, 2024, which would cause Enviva to voluntarily file for Chapter 11 bankruptcy protections in the Eastern District of Virginia. Enviva and the Ad Hoc creditor group, represented by Evercore, entered into a restructuring support agreement (RSA) on that same date, which outlined details of the in-court transaction to be pursued. 

Secured Claims:

The chart above details Enviva’s capital structure at the time of filing. To start, the senior secured revolver and term loan comprise the “Senior Secured Credit Facility.” Originally, Barclays served as the administrative agent but was later replaced by Ankura Trust Company, LLC in February of 2024. The credit facility was secured on a first-lien basis and made up a total of $672.5mm in aggregate claims. According to the RSA, the senior secured facility’s creditors would be made whole and therefore were not allowed to vote on the solution (remember that only impaired debt classes are allowed to vote) [1]. 

Enviva’s other secured class of debt consisted of New Market Tax Credit (NMTC) loans. Enviva issued 2 NMTC loans worth a total of $72.4mm for the construction of the new plant in Epes, Alabama. These funds were issued to Enviva at low rates by regional banks, who would receive federal tax credits in exchange for supporting investments in low-income areas such as Epes, Alabama. 

Unsecured Claims:

Enviva’s largest tranche of debt, making up $750mm in principle, was the 2026 Senior Unsecured Notes. Next were the Epes, AL and Bond, MS Green Bonds, worth $250mm and $100mm, respectively. These made-up aggregate claims of $1.1bn and would be known as “Bond General Unsecured Claims.” As class 5, they were the first to be impaired under the RSA and would be entitled to vote [1]. 

The other unsecured class consisted of Non-Bond General Unsecured Claims (Class 6). The primary claim here would be RWEST’s $350mm termination fee. Class 6 would be the only other class entitled to vote on the RSA. We’ve covered the important classes, and the table below details the treatment of other claims:

Restructuring Support Agreement

As a reminder, an RSA is essentially a plan of reorganization discussed ahead of the actual Chapter 11 filing. The original RSA, dated February 15, 2024, outlined the key changes that would be made to Enviva’s capital structure. Having the RSA prepared before filing allowed Enviva to quickly begin soliciting creditors' votes on whether to approve it. Enviva would need creditors representing 50.1% in the number of votes and 66.7% in the amount of debt outstanding to approve the plan for it to be enacted. Keep in mind that only classes 5 and 6, consisting of Enviva’s unsecured claims would be allowed to vote, as the rest of the claims were either unimpaired or deemed to reject the plan. 

The RSA can be broken down into 4 parts: 

1. $500mm of critical Debtor-in-Possession (DIP) financing

2. A $1bn senior-secured exit facility

3. The equitization of $1.1bn of unsecured claims

4. A $250mm+ Equity Rights Offering (ERO)

The first step of the RSA involved Enviva securing $500mm in DIP financing from current lenders. The financing was split into Tranche A and Tranche B, both worth $250mm. Tranche A holders would have the option to convert into reorganized equity at the same discount as the ERO or to be paid in full upon Enviva’s exit from Chapter 11. Tranche B would simply be paid in full. The DIP facility provided the necessary financing for Enviva to navigate the 9 months it spent in the bankruptcy process. 

Next, the RSA involved the $1bn first lien senior secured exit facility, consisting of a $250mm delayed draw term loan and a $750mm exit term loan. The exit facility would be secured on a first-lien basis on substantially all assets of the company. This would be the only debt in the reorganized Enviva’s capital structure. Proceeds from the exit facility would be used to fully pay off the current secured credit facility. The excess cash after refinancing would represent new money to be used for the construction of the Epes, Alabama plant. 

The primary reduction in debt came from the equitization of Enviva’s unsecured claims. First, Class 5 holders, which consisted of the 2026 notes and green bonds, were entitled to receive their pro-rata share of reorganized equity and 89.91% of litigation trust interests (claims from the lawsuits against former management). If any holder did not exercise their rights to the equity, they were entitled to 6.62% of the outstanding principle in cash, so for example, the 2026 note holders would be entitled to either a pro-rata share of new equity or a portion of roughly $50mm (750 x 6.62%). Next, Class 6 holders, which consisted of the non-bond general unsecured claims, were entitled to their pro-rata share of $41.94 million and 10.09% of litigation trust interests. 

Lastly, the RSA included an equity rights offering, allowing stakeholders to purchase discounted shares in the reorganized entity pool, worth $250mm plus the amount of any DIP Tranche A debt not originally converted. Proceeds from the ERO would be used to repay DIP Tranche B and the unconverted portion of Tranche A. The ERO was backstopped by the Ad Hoc Group, meaning any unsubscribed shares would be purchased by certain AHG members. A major player in this part of the RSA was American Industrial Partners (AIP), a middle-market industrials private equity fund [8]. AIP provided $92.3mm in funding through the ERO and $124.5mm of DIP Tranche A funding, which the firm elected to turn into equity, resulting in an aggregate investment of $216mm [7]. 

The Future of Enviva

Enviva, LLC announced its successful emergence from Chapter 11 bankruptcy on December 6, 2024. The company was able to equitize $1.1bn worth of debt, and its new capital structure is much slimmer [6]. The previous senior secured credit facility was replaced by a new $750mm term loan and $250mm delayed draw term loan. This new facility makes up the only debt in Enviva’s new capital structure, accompanied by reorganized equity from the ERO, DIP Tranche A, and former unsecured creditors. American Industrial Partners Capital Fund VIII is the largest shareholder of the now-private Enviva, owning 43% of the reorganized entity [6][7]. 

Operationally, Enviva has paused the construction of its plant in Bond, Mississippi but will continue building the facility in Epes, Alabama, which will be the largest wood pellet-producing facility in the world. The Epes facility is projected to supply roughly 1.1 million metric tons of wood pellets per year, increasing Enviva’s total production by over 20%, and helping them meet demand from long-term contracts, ideally without relying on spot market purchases. New money from Enviva’s restructuring will support the company through the construction of the Epes facility, which is projected to be finished by Q2 2025 [1]. 

Lazard’s financial projections for Enviva show them becoming cash flow positive as soon as 2025 and posting positive net income in 2027. The company will also be under new leadership. Glenn Nunziata, the former interim CEO who spent 19 years at EY and 7 at Smithfield Foods as CFO, will lead the reorganized Enviva as CEO. James Geraghty, the former Executive VP of Finance, will serve as CFO [1]. Here’s what Mr. Nunziata has to say about Enviva’s restructuring:

“Emergence is a critical milestone and exciting step forward in positioning Enviva for a successful future. On behalf of Enviva, I want to express our gratitude to all our stakeholders, especially our customers and associates, for their continued business and support. With a substantially reduced debt burden and dramatically improved liquidity profile, we are well-positioned to serve our customers reliably as a leading producer of industrial wood pellets and to rebuild trust and confidence in the communities in which we operate and markets in which we sell our product.” – Glenn Nunziata [6]

Enviva’s case was quite unique. Common shareholders went from owning a piece of a multi-billion-dollar company, the world’s largest wood pellet producer, to owning virtually nothing. As we’ve seen, it wasn’t a decline in demand that ultimately led to Enviva’s demise. Rather, it was the desperate attempts to meet contractual demand, both through the spot market purchases and the rapid financing of new facilities. Going forward, it will be interesting to see if Enviva is able to prioritize sustainable growth through reasonable contracted volumes or if it will fall back into the same trap. 

Sources: [1],[2],[3],[4],[5],[6],[7][8]

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