Fri 06/04/2021 17:38 PM
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Editor’s Note: Reorg's coverage of CalPlant I is part of an expansion of our municipals-focused offerings. Please reach out to sales@reorg.com for more information.

Relevant Documents:
Notice (June 1)
Notice (May 28)
May 14 Bondholder Report
April 9 Refiner System White Paper
Notice (Feb. 22)
Notice (Oct. 16, 2020) and Non-Acceleration Agreement
Notice (July 1, 2020)
Notice (June 2, 2020) and Forbearance Agreement
Issue Details (Series 2017 Green Bonds)
Issue Details (Series 2019 Subordinated Green Bonds)
Issue Details (Series 2020 Green Bonds)
Financial Statements

California Pollution Control Financing Authority has issued over $343 million in three series of green bonds to finance the construction of a medium-density fiberboard plant in Willows, Calif., known as the CalPlant I Project. CalPlant is in default on both the senior Series 2017 and subordinated Series 2019 bonds, with forbearance agreements with bondholders in place that run through October. On June 1, the Series 2019 bond trustee UMB Bank disclosed in a notice to EMMA that it would not be making “all or part of” the June 1 interest payment after receiving a direction from the holders of a majority of the subordinated Series 2019 bonds. To read more of our Americas Municipals' coverage of the CalPlant I Project as well as our coverage of other timely, objective and actionable intelligence covering higher yielding and liquid municipal issuers request a trial here.

CalPlant I LLC, the borrower on the green bonds, manufactures “environmentally conscious” medium-density fiberboard, or MDF, from renewable locally sourced post-harvest rice straw, traditionally a waste product, instead of traditional wood MDF, according to its website. CalPlant “believes that rice straw has never before been used to produce MDF on a commercial scale” and that it is “first in the world to do so,” according to the offering memorandum for the 2017 bond issuance.

The three tranches of debt are (A) $228.165 million in solid waste disposal revenue bonds Series 2017 green bonds, secured by a senior lien on the plant and senior liens on other assets of CalPlant; (B) $73.685 million in solid waste disposal revenue bonds Series 2019 subordinated green bonds, secured by a subordinate lien on the plant and subordinate liens on other assets of the borrower as well as a first lien on at least 75% of the membership interests in the borrower’s parent company, CalPlant I Holdco LLC; and (C) $42 million in solid waste disposal revenue bonds Series 2020 green bonds, secured by a senior pari passu lien on the plant and on other assets of the borrower. The indenture trustee on the senior Series 2017 and Series 2020 bonds is BOKF NA, and the indenture trustee on the Series 2019 subordinated bonds is UMB Bank NA.

The Series 2017 senior bonds and Series 2019 subordinate bonds have been in distress for some time. According to the borrower’s financial statements for the years ended Dec. 31, 2020, and 2019, CalPlant experienced “significant construction delays and cost overruns” resulting in the company “being in default on both the 2017 Series Bonds and 2019 Subordinate Bonds as of December 31, 2020.” In addition, CalPlant “experienced unanticipated difficulties and delays in beginning full-scale operations at its manufacturing facility,” according to the financial statements. As a result, the borrower’s auditors expressed substantial doubt about the company’s ability to continue as a going concern “within one year after” the issuance of the financial statements.

In 2020, the company failed to make both its interest payment due on the Series 2019 subordinated bonds in June and its interest payment due on the Series 2017 senior bonds in July. On June 2, 2020, UMB Bank disclosed in a notice to EMMA that holders of approximately 90% of the Series 2019 subordinated bonds signed a forbearance agreement with CalPlant and that, at the holders’ direction, UMB Bank did not make the interest payment due June 1, 2020, except for certain undisclosed amounts as agreed to in the forbearance agreement. The next month, on July 1, 2020, BOKF disclosed in a notice to EMMA that CalPlant was unable to make the July 2020 interest payment on the Series 2017 senior bonds and that BOKF, at the direction of a majority of the senior bondholders, had also entered into a forbearance agreement. Both forbearance agreements have been extended a number of times and are now set to expire in October 2021.

On Oct. 16, 2020, UMB Bank disclosed in an EMMA posting that it had entered into a non-acceleration agreement that extended the subordinated bondholders’ forbearance period through the earlier of Oct. 13, 2021, or the occurrence of certain termination events. One of the “Anticipated Specified Defaults” covered under the non-acceleration agreement was CalPlant’s failure to make the scheduled June 1, 2021, interest payment on the subordinated bonds. The Oct. 16, 2020, EMMA notice also disclosed that the California Pollution Control Financing Authority issued, and CalPlant purchased, $42 million in par value of the new 2020 senior bonds on a parity basis with the Series 2017 senior bonds.

According to a Feb. 22 notice by UMB Bank, the balance in the Series 2019 subordinate bond reserve fund was $2.2 million, which was insufficient to make the scheduled $2.8 million interest payment due June 1, as anticipated by the non-acceleration agreement. The notice further stated that CalPlant would remain unable to make debt service payments and would not be paying UMB Bank’s fees and expenses during the continuing period of the forbearance period.

In addition to financial distress, CalPlant has encountered substantial construction and operational difficulties. For example, the bonds’ offering memorandums state that CalPlant has entered into a number of contracts with German machinery company Siempelkamp for the construction of the plant and installation of equipment. As part of these contracts, Siempelkamp is required to meet production output and quality standards. Various EMMA postings show, however, that the company has undertaken efforts to substantially improve operations.

On April 9, UMB Bank posted a white paper, written by Stephen Vajda Consulting at the trustee’s request, containing an overview of the refining system at the plant in order to “assist bondholders in understanding the system and the difficulties currently being experienced.” The white paper addresses the “significant difficulties” experienced by CalPlant “during commissioning and start-up of the refiner systems which has delayed the start of commercial production and revenue generation” at the plant and makes a number of recommendations for operational improvements. However, the white paper notes that “further improvements are still to be made” in order to achieve higher-quality MDF.

According to a May 14 bondholder report, the construction phase of the project is completed “except for immaterial items.” However, the report noted “continued struggles getting to a quality fiber and longer consistent runs” and as a result CalPlant “do[es] not expect Plant Acceptance to occur until July at the earliest, pushing commercial operations back accordingly” (emphasis added).

The May 14 report also noted that CalPlant would be entering into mediation on May 21 with The Hartford, its insurance carrier, related to a disputed claim over $3.7 million of inventory destroyed by a fire.

On May 28, BOKF posted to EMMA the various fund balances as of May 27 at the request of certain bondholders, as shown below:

BOKF has retained Mintz Levin in connection with this matter.

The subordinated bondholders were represented by Kramer Levin as legal counsel and Dundon Advisers as financial advisor in connection with the forbearance and non-acceleration agreements discussed above, as well as the borrower’s efforts to obtain additional financing in the second half of 2020, according to disclosures made by UMB Bank.
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