Texas Pellets back of envelope valuation indicates possible cut for bondholders
Texas Pellets bondholders may not receive full payment on their debt if the plant is sold, said a municipal credit analyst and William Strauss, president of wood pellet consultancy, FutureMetrics.
The Woodville, Texas based facility has roughly USD 188m in bonds outstanding. But back of the envelope calculations value the plant from anywhere between USD 52m and USD 120m, according to Debtwire Municipals calculations, using methodologies provided by Strauss and Siddharth Rajeev of Fundamental Research Corp.
That’s far less than the amount outstanding on the bounds. The bonds trade only rarely, but an unrated USD 157.2m tranche of Texas Pellets bonds last traded in round lots on 8 June at 87.125, yielding 9.393%, according to Electronic Municipal Market Access.
“The probability of getting [the full] value is fairly low,” said the municipal credit analyst.
Texas Pellets, which filed for Chapter 11 bankruptcy protection on 30 April, hired Guggenheim Securities as investment banker to provide advice for a potential sale, reorganization or liquidation. Its parent company German Pellets is also in insolvency proceedings in Germany, making a sale of the plant likely, said Strauss.
Valuing wood pellet facilities isn’t as straightforward as valuing other facilities — such as natural gas or coal — since the market is newer and there have been fewer sales to use as comparisons, said an appraiser of renewable energy facilities and a consultant in the forest products industry.
Given the number of moving parts, an analysis performed now is unlikely to be accurate, said a Texas Pellets bondholder. Even so, the bondholder contended, the price is unlikely to be below par because there is still more demand than capacity. But demand has fallen from projections made at the time of Texas Pellets underwriting, leaving US and Canadian pellet makers set to produce about 2.5m metric tons, or 25% more than needed, according to one analysis, as previously reported.
Establishing enterprise value
Still, there are ways to get back of the envelope estimates — albeit rough ones, said Strauss and Rajeev.
One way to calculate enterprise value is multiplying EBITDA by an industry multiple. But that can be a moving target for several reasons, chief among them is that EBITDA (earnings before interest, taxes, depreciation and amortization) is not often used as a way to measure financial performance for a municipal bond borrower. Also, unlike more established industries, wood pellets manufacturers don’t have a widely recognized industry multiple.
But Enviva Biomass, a major wood pellet player, has an enterprise value multiple of about 10x, Rajeev said. Using that multiple would be generous, said Strauss, because Enviva is a company with public equity and investors are likely factoring in growth to the stock price, whereas Texas Pellets is a project with a defined capacity, Strauss said.
Pellet facilities have recently sold with multiples in the 4.5x to more than 6x range, said Strauss. On the upper edge of the range, there may be clauses that require that the company perform to a certain level in order to receive the full payment, said Strauss. This was the case when Rentech bought New England Wood Pellet in 2014 at a 6.1x multiple, Strauss said.
In Texas Pellets case, calculating EBITDA is more tricky than digging up an industry multiple. Texas Pellets’ last published full year financials in 2014. It disclosed in its statement of financial affairs that its gross revenue in 2015 was USD 86.0m, resulting in a gross profit to gross revenue ratio of 13.4%. Assuming its gross profit to gross revenue ratio was the same in 2015 as it was in 2014, gross profit would have been USD 11.5m for 2015.
Using gross profit as a proxy for EBITDA (which is likely generous because it excludes selling, general, and administrative expenses), and a 4.5x as a low end and 10x as a high end multiple, the plant would be worth between USD 51.8m and USD 115m. On the other hand, Texas Pellets had start-up problems, which could mean that the profit will be higher in future years, said Strauss
Long dollars and short tons
Another way of valuing the company is by measuring cash flow expectations by short ton of pellets produced. A good “ballpark starting point” for cash flow by short ton is USD 20.00 per short ton, said Strauss. That the plant operates at 90% capacity (which is on the high end of typical), the plant would be worth between USD 51.6m and USD 114.7m.
Texas Pellets could earn more than the USD 20 per yearly short ton depending on Texas Pellets contracts to sell pellets — they provide pellets to UK utility Drax — and its contracts to receive wood to make pellets, said Strauss.
Another option is to look at the estimated capital investment, which would be about USD 175 per short ton of annual capacity for a large plant like Texas Pellets, said the consultant. That would give Texas Pellets a value of about USD 111m.
That figure only takes into account hardware costs, which likely around USD 250 per short ton of annual capacity after paying for site development, construction, financing costs and the like, which would mean replacing the facility would cost around USD 159m, and other factors could drive that number higher, said Strauss. But that would likely be a ceiling on the price, he said.
Room for negotiation
“You can think of the greenfield value as an upper limit – the cash flow is sort of a middle ground,” said Strauss. “Debt holders are likely to not fully recover what they’re owed.”
Texas Pellets may have some assets in addition to the value of the plant if it’s sold, such as money in debt service reserves, said the credit analyst.
Drax, which has a contract to buy pellets from Texas Pellets, would be the obvious buyer of the facility, said the credit analyst. They also already make their own pellets and have a port in Baton Rouge. A Drax spokesperson said that the company “never [comments] on this sort of speculation.”
Still, there’s “fairly large number people interested in purchasing,” the credit analyst said, the question is at what price.
An attorney at Locke Lord, which represents Texas Pellets in the bankruptcy, and a spokesperson for Guggenheim declined to comment. An attorney at Mintz Levin, which represents the bondholder trustee, did not respond to a request to comment. German Pellets did not respond to a request to comment.