Enviva equity cushion goes up in smoke after dividend cut

Nicolle Liu

4 May 2023•3 min read

Enviva’s bonds fell more than 10 points today, after the wood pellet producer triggered a giant selloff in its stock by cutting its dividend. The company also announced that it anticipated a greater-than-expected loss this year due to higher costs and production shortfalls.

The announcements came as the company reported first-quarter earnings revealing a more than 90% year-over-year decline in adjusted EBITDA, which fell to $3.4m. As of the time of writing, Enviva’s stock is down nearly 64% at $7.76 per share.

Enviva’s market cap is now just $521m, compared to $1.57bn last month, when we published an article highlighting the company’s intense cash burn and questioning its capital allocation priorities.

The company’s decision to eliminate its dividend will reduce its cash-burn rate, but the move has also wiped out roughly two thirds of lenders’ equity cushion. Enviva’s $750m 6.5% senior notes due 2026 (rated B1/B+/ BB-) are quoted at 74.81 as of this afternoon, for a yield of 18.8%.

In a press release accompanying the earnings release, management said that removing the dividend would provide roughly $1bn in incremental cash flow between 2023 and 2026, and reduce the need to raise additional debt for new plants.

However, as we noted in our recent article, some form of capital raise may still be needed if Enviva is to meet its expansion plans. On top of that, earnings are set to be significantly worse than expected this year.

The company is now projecting a net loss of $136m-$186m for 2023, up from prior estimates of $18m-$48m. Meanwhile, adjusted EBITDA is projected at $200m-$250m, down from a prior forecast of $305m-$335m.

Fighting fires

Cutting the dividend will help Enviva to “preserve liquidity and a conservative leverage profile, maintain our current growth trajectory [and] potentially accelerate future investments in new fully contracted plant and port assets, said John Keppler, the company’s chairman.

The move will also enable the company to “implement a limited share repurchase program,” Keppler added.

At the time of our last story, Enviva was levered between 6.5x and 10.3x on a gross basis, depending on the extent to which deferred earnings were factored into calculations. The latest earnings increase leverage by roughly a turn and a half, according to our calculations.

The company’s own assessment of leverage appears to be much more generous. During today’s earnings call, CFO Shai Even said Enviva was committed to maintaining a leverage ratio of 3.5x to 4x per its credit agreement.

“We expect 2023 to be a little above that, but it will be temporary, and we expect to get back to our target range early in 2024,” he said. The company said it was compliant with all covenants at quarter-end, and the CFO noted that the leverage threshold under its credit agreement is 5.75x.

Enviva generated extra margin last year due to arbitrage opportunities sparked by Russian’s invasion of Ukraine. However, these opportunities have diminished as commodity prices have normalized, said Jordan Levy, an equity analyst at Truist, in a report today.

High contract labor costs, inadequate spending discipline regarding repairs and maintenance, a need for lower and consistent wood input costs, and low utilization rates at specific plants are pain points for Enviva, said president and CEO Thomas Meth during the earnings call.

Enviva did not reply to a request for comments.