Summary |
CalPlant owns a plant in California’s rice growing region that manufactures medium density fiberboard out of rice straw, traditionally a waste product; the plant is producing MDF but not yet fully operational |
Has $344 million secured municipal debt in three issuances of green bonds |
Filed a plan support agreement outlining a dual-track process contemplating either a sale of substantially all assets or stand-alone restructuring |
CalPlant I LLC and parent company CalPlant Holdco, manufacturers of rice straw-based medium-density fiberboard, or MDF, in Willows, Calif., filed for chapter 11 protection yesterday, Tuesday, Oct. 5, in the Bankruptcy Court for the District of Delaware. The debtors enter chapter 11 having executed a plan support agreement with about 62% of holders of the company’s senior bonds and the senior bond trustee. The PSA provides for “two largely parallel restructuring paths,” according to the first day declaration, which consists of a sale process to market test substantially all of the debtors’ assets, or, in the event a sale process is unsuccessful, a debt restructuring through a chapter 11 plan “to be negotiated in good faith with the Senior Bondholders.”
The debtors say that they expect such restructuring would include “a debt-for-equity transaction, some form of take-back debt, and/or exit financing on terms to be negotiated.” The bid procedures would allow for designation of a stalking horse and a credit bid by the senior bond trustee.
CalPlant is the
obligor on over $343 million of municipal debt comprising three series of green bonds issued by the California Pollution Control Financing Authority. The company manufactures “environmentally conscious” MDF from renewable locally sourced post-harvest rice straw, traditionally a waste product, instead of traditional wood MDF. The debtors assert that given the lack of an existing template for a plant of this type, they have encountered various setbacks, including construction delays, equipment and manufacturing issues and cost overruns that led to a “considerable” liquidity crunch and impeded the debtors’ ability to fully commission the plant on its intended time frame.
The cases would be funded by DIP financing from certain of the consenting bondholders, which have committed to directly purchase $30.1 million of new taxable bonds, of which $4.1 million would be used to repay the prepetition bridge obligations. BOKF is the DIP trustee. The debtors have also obtained authorization to use the senior bond trustee’s cash collateral.
The PSA, which is attached to the first day declaration, includes a plan term sheet previewing the debtors’ dual-track sale/restructuring plan.
The debtors are seeking court authorization to assume the PSA, with a failure to obtain such approval within 30 days of the petition date constituting a PSA termination event and a default under the DIP financing agreement, according to the agreement. The debtors highlight that the PSA contains a “fiduciary out,” which they say was an “important component” in their decision to enter into the agreement. Material modifications to the PSA that are adverse to the debtors require further court approval.
Broadly, the plan contemplated by the PSA calls for DIP claims to be paid in full in cash along with other “required plan payments.” However, any secured claim with priority over the senior bonds may also receive other treatment as agreed to by the debtors and the senior trustee. Senior bondholders would receive either the net sale proceeds until paid in full or obtain a recovery through another form of debt restructuring transaction (such as a debt-for-equity swap, take-back debt or exit financing).
Subordinated bonds would receive their pro rata share of a distribution, provided any exists after DIP claims, senior bond claims and other required plan payments are paid in full in cash. General unsecured claims would receive pro rata shares of a distribution “to which it is legally entitled,” if any, after satisfaction of all senior claims under the plan.
The PSA also targets a March 4, 2022, emergence from chapter 11.
The first day hearing has been scheduled for tomorrow, Thursday, Oct. 7, at 11 a.m. ET.
The CalPlant I Holdco petition lists the debtor as having $50 million to $100 million in assets and $0 to $50,000 in liabilities, and subsidiary CalPlant I’s petition says the company has $100 million to $500 million in both assets and liabilities. The company’s prepetition capital structure includes:
- Secured debt: The company has $343.9 million of secured debt. The 2017 senior bonds mature in three tranches, which have varying maturity dates and coupon rates but are otherwise the same series. The 2017 and 2020 senior solid waste disposal revenue bonds, along with the 2019 subordinate solid waste disposal revenue bonds, have a security interest and lien on substantially all of CalPlant's assets, including the site and the plant, and a pledge of CalPlant I Holdco's membership interest in CalPlant I. The subordinate bonds are also secured by a first priority security interest on approximately 80% of the membership interests in CalPlant I Holdco. Under the terms of the collateral agreement, the senior bonds are entitled to payment in full, on a ratable basis between the 2017 and 2020 bonds, from the proceeds of the collateral before any distribution is made to the subordinate bonds.
- Unsecured debt: The company’s list of largest unsecured creditors is led by Siempelkamp Maschinen with a $2.7 million equipment supply claim. As previously reported, the debtors and supplier Siempelkamp Maschinen have been mired in a series of ongoing disputes over delays related to CalPlant’s “plant acceptance.” According to the press release, CalPlant says that, subject to court approval, “substantially all trade vendors who will have an ongoing business relationship with the Company will be paid for goods and services in the normal course of business without interruption."
- Equity: The petition shows the following list of equity security holders in CalPlant I Holdco:
The debtors are represented by Morrison & Foerster and Morris James as co-counsel, and Paladin Management Group as financial and restructuring advisor. Prime Clerk is the claims agent. Michael Schlemback serves as an independent director of the CalPlant I’s board. The case has been assigned to Judge John T. Dorsey (case No. 21-11302).
Events Leading to Bankruptcy Filing / Prepetition Restructuring Efforts
The company attributes the bankruptcy to various construction setbacks, including difficulties with contract parties, Covid-19-based disruptions, and struggles obtaining the desired quality and quantity of MDF. According to the debtors, Siempelkamp Maschinen-und Anlagenbau GmbH - a Germany-based global equipment manufacturer for the wood-based panel board industry and the debtors’ primary partner for engineering, design, commissioning and testing of the plant’s production process - diverted from the original supply contract by using new, improved equipment for the project instead of the equipment originally specified. The debtors say that they agreed to this deviation because they believed the new equipment would be more efficient, but that they were required to incur significant and unexpected costs and delays to re-engineer the plant in order to accommodate the new equipment.
Construction progress faced delays under the management of the original general contractor, Casey Industrial, leading to Casey's termination and the decision by the debtors and Siempelkamp to continue construction without a general contractor. In spring 2020, the Covid-19 pandemic forced all of Siempelkamp’s employees and contractors to return to Germany and prevented them from returning to the United States for several months, resulting in the complete halt of commissioning until August 2020, when the company obtained an exemption that allowed the Siempelkamp employees to travel to the construction site.
“While California granted an exception to Covid-19 related stop-work orders for construction projects, the Debtors did suffer stoppages at the outset of the pandemic with respect to their U.S.-based employees, including as a result of employees contracting or being exposed to COVID-19 during the course of the pandemic,” the debtors say, adding that “to this day, the Debtors continue to experience some interruptions to the commissioning process due to COVID-19 related issues affecting their own workforce.”
“When it became clear at the beginning of 2020 that the Plant’s operational setbacks were placing a huge strain on CalPlant’s liquidity,” the debtors engaged Morrison & Foerster in addition to external general counsel Hepner & Myers to explore various strategic alternatives and initiate negotiations with senior bondholders.
The debtors launched multiple capital raising efforts that resulted in the contribution of substantial equity and the issuance of the 2019 subordinate bonds and the 2020 senior bonds. The debtors entered into
forbearance agreements with their senior and subordinated bondholders and, because of continued difficulties in the second quarter of 2020, received an infusion of $42 million in the form of the proceeds of the 2020 senior bonds. Since then, the debtors have continued to face
further delays in commissioning the plant.
By June 2021, “it became clear” that the debtors’ target date for the plant to be fully operational would not be achieved, leading the debtors and their advisors to re-engage with the senior trustee and certain senior bondholders to explore options to the liquidity constraints and longer-term leverage outlook. The senior trustee released $4.1 million of the proceeds of the senior bonds for the purpose of paying certain costs related to the plant’s operations and the debtors’ restructuring efforts.
Background
According to the first day declaration, the debtors have constructed the world’s first plant capable of manufacturing MDF from rice straw, a waste product of rice farming. The debtors assert that their business offers rice farmers a “considerably more cost-effective” means to dispose of waste rice straw, and that their MDF is “high quality, environmentally friendly, and competitively priced.” The plant is on 273 acres of debtor-owned property in Willows, at the northern end of California’s 50-mile rice growing region, which “puts it at the crux of the Debtors’ supply chain.” The debtors’ primary feedstock - rice straw - is expected to come largely from farms within a 25-mile radius. The debtors say they expect two deep wells that are located on its factory site to produce sufficient water supply to operate the plant.
Pursuant to the terms of a fixed-price equipment supply contract, Siempelkamp is the debtors’ primary partner for engineering, design, commissioning and testing of the plant’s production process. Approximately $8.5 million of the purchase price for the Siempelkamp equipment has been contractually deferred until Feb. 15, 2022. Interest on the deferred amount is payable in installments, the first of which is approximately $350,000 and due Dec. 10, and the second is approximately $1 million and due April 1, 2022.
An important milestone for Siempelkamp’s performance under the contract is achieved by running a series of performance tests to confirm whether the plant can produce MDF consistently and according to specified requirements (referred to in the filings as “Plant Acceptance”). If the plant’s equipment fails to achieve these values following this testing, Siempelkamp would be obligated to pay liquidated damages to the debtors, and, “under certain circumstances,” the debtors can require Siempelkamp to remove the Siempelkamp equipment and reimburse the debtors for the amounts paid under the supply contract.
As of the petition date, all of the equipment purchased by the debtors from Siempelkamp has been delivered to the site. Although Siempelkamp has not yet achieved plant acceptance, the debtors expect that it will be achieved in early 2022. There is currently a dispute between debtors and Siempelkamp regarding amounts which Siempelkamp says the debtors owe under the supply contract. In addition, the debtors say that they believe they have claims against Siempelkamp on account of delays in reaching plant acceptance.
The plant has been in development for nearly three decades and has been selling MDF for six months, but it is not yet fully operational. The debtors anticipate that at full capacity, the plant would be capable of converting about 280,000 tons of post-harvest waste into 140 million to 150 million square feet (based on a 3/4-inch normalized thickness) of MDF on an annual basis.
The debtors say that although they have not yet met their targeted MDF production capacity or quality, the plant is “mechanically complete” and produced its first MDF in November 2020.
They say they anticipate the plant will be fully operational “in the near future” and that they will achieve plant acceptance sometime in early 2022, with production of “A-grade” MDF shortly thereafter. However, full operating capacity is not expected to be reached until 2024. The debtors are in the process of completing the necessary steps to secure a certificate of occupancy for the plant and expect to obtain this certificate by year end “provided there is no material disruption to the commissioning process.”
The market for MDF has generally improved over the past 12 months, the debtors say, adding that they have been able to sell substantially all of their product. The “strong demand” is driven by many factors, including increases in residential construction, closures of MDF manufacturing facilities based in North America, and supply chain issues faced by importers of wood-based MDF products manufactured abroad. If the plant can achieve its targeted annual production, that production would represent approximately one-third of California’s annual demand for MDF on a historical basis.
The company’s corporate organizational structure is as follows:
The debtors’ largest unsecured creditors are listed below: