LOS ANGELES, Dec. 10 /PRNewswire/ -- Aventine Renewable Energy Holdings, Inc. (Pink Sheets: AVRNQ) stockholder Andrew Shirley, in a letter to the Board of Directors dated December 3, 2009, asks the Board to evaluate reorganization alternatives that preserve stockholder value. Mr. Shirley shows that both ethanol margins and the credit markets have recovered dramatically over the past eight months, suggesting that the primary conditions that precipitated the company's bankruptcy filing in April 2009 no longer exist. Mr. Shirley provides a Capital Structure Analysis which offers a seemingly feasible reorganization alternative that preserves stockholder value. He also provides a Valuation Analysis which contends that Aventine pre-petition stock has substantial value. Mr. Shirley owns approximately 900,000 shares of Aventine stock, or 2.1% of the shares outstanding.
Mr. Shirley encourages other stockholders with an interest in preserving stockholder value to contact him via email at:
DISCLAIMER: The analyses contained herein should not be construed as Mr. Shirley giving investment advice to any person. He also cautions any person against relying on the analyses or the contents of the letter in making any investment decision. Before making any investment decision, any existing or prospective investor should read the company's SEC filings and the company's Plan of Reorganization, Disclosure Statement, and other filings with the U.S. Bankruptcy Court for the District of Delaware (Case No. 09-11214). The currently proposed Plan of Reorganization for Aventine provides only for a de minimis recovery for pre-petition stockholders.
The following is the text of the letter:
December 3, 2009
Board of Directors Aventine Renewable Energy Holdings, Inc. 120 North Parkway Drive Pekin, Illinois 61554
To Members of the Board:
I am an Aventine Renewable Energy Holdings, Inc. ("Aventine" or "the Company") equity holder and I currently own approximately 900,000 shares of common stock, or 2.1% of the outstanding shares. I have 18 years of professional investment experience, including more than 10 years of bankruptcy investing experience.
I am writing to request that the Board use its best efforts to evaluate the feasibility of Chapter 11 reorganization alternatives that preserve shareholder value and ownership. My analysis shows that Aventine pre-petition equity has substantial value, potentially more than $10 per share, and that a fair and equitable plan of reorganization can be structured to benefit all stakeholders, including shareholders. As court documents indicate, Aventine filed for bankruptcy on April 7, 2009 due to the confluence of weak ethanol margins and a global credit crisis. However, as I am sure you are aware, both ethanol margins and the credit markets have recovered dramatically since the filing date. As a result of this recovery, the primary conditions that precipitated Aventine's bankruptcy filing no longer exist and pro forma earnings sufficiently support the Company's capital structure and operating plan. Accordingly, the Board has an obligation to use its best efforts to evaluate reorganization alternatives that preserve value for all stakeholders, including shareholders. The contents of the remainder of this letter will justify my request and the Board's obligation.
ETHANOL MARGIN RECOVERY
Supply-and-demand in the ethanol industry has returned to balance after a period of great dislocation in late 2008 and early 2009. The resulting recovery in ethanol plant EBITDA margins has been impressive, from breakeven or below to a multi-year high of more than 50 cents per gallon currently. On October 12, 2009, The Wall Street Journal published an article titled "Christmas in October for Ethanol" which highlighted "wide profit margins" for ethanol producers. Beyond the headlines, Aventine's October 2009 Monthly Operating Report, filed with the bankruptcy court, shows that the Company achieved plant-level EBITDA margins of approximately 50 cents per gallon for the month. Ethanol margins have continued to expand in the ensuing weeks and may currently exceed 70 cents per gallon for Aventine. Key factors in this recovery include: (1) continued growth in ethanol demand mandated by Renewable Fuel Standard ("RFS") legislation; (2) absorption of blenders' excess renewable identification numbers ("RINS"); (3) lower corn, natural gas, and other input costs; (4) a near doubling of gasoline prices that now encourage discretionary ethanol blending; (5) a spike in Brazilian ethanol prices that makes U.S. imports uneconomical and potentially opens export markets to U.S. producers; and (6) the idling of higher-cost ethanol plants. While a few new ethanol plants are scheduled to come on line over the upcoming months and other idled plants may restart if attractive margins persist, this incremental capacity will be absorbed by a 1.5 billion gallon, or 14%, increase in RFS blending mandates in 2010 (from 10.5 billion to 12.0 billion gallons). By 2015, RFS mandates call for a 4.5 billion gallon, or 43%, increase in ethanol blending over 2009 levels, providing a huge multi-year tailwind to ethanol supply-and-demand fundamentals and margins.
CREDIT MARKET RECOVERY
Global and U.S. credit markets have improved dramatically since the Aventine bankruptcy filing in early April. The CSFB High Yield Index is up 40% over this time with yield spreads tightening from 1,500 to 730 basis points. The CSFB Leveraged Loan Index has similarly improved, up 30% from 65 at the end of March to 85 at the end of October. Aventine's own 10% Notes due April 2017 are up almost 500% from 12 cents on the dollar in April to approximately 70 cents recently.
Strong margins and enviable multi-year fundamentals suggest that Aventine should have sufficient access to credit market capital. A sample of leveraged and cyclical commodity producers includes, but is not limited to, Bunge, Dow Chemical, Neenah Paper, Rockwood Holdings, Smithfield Foods, Tyson Foods, Sunoco, and Valero. The leverage ratios for these companies range from 3x to 9x, calculated as net debt divided by EBITDA, and the unsecured credit ratings range from BBB to CCC+. Many of these companies successfully issued unsecured bonds over the last nine months and yields to maturity on selected bonds range from 5% to 10%, with spreads of 225 to 725 basis points. This summary data illustrates that the credit markets "understand" the nature of cyclical industries and currently offer affordable access to capital, even in recessionary times. Furthermore, the ethanol industry has a decided advantage over most cyclical industries as blending mandates increase 14% in 2010 and 43% over the next six years.
Aventine currently operates 207 million gallons of ethanol capacity and should generate more than $100 million of plant-level EBITDA based on recent industry margins of more than 50 cents per gallon. At this level of earnings, the Company can cover all fixed costs including interest expense on existing debt, interest expense on exit financing debt, taxes, and maintenance capital requirements. Aventine also has two nearly completed ethanol plants for which construction is currently suspended. If successfully completed, these plants would add approximately 226 million gallons of ethanol capacity and generate more than $100 million of additional EBITDA at recent margins. These plants are now 85-90% constructed and require an additional $70-100 million capital investment to complete. Pro forma for completion of the plants, Aventine would operate 433 million gallons of ethanol capacity and generate more than $200 million of EBITDA at recent margins.
CAPITAL STRUCTURE ANALYSIS
With the dramatic recovery in credit markets and industry margins, Aventine now has financing options available that it did not have in the March-April 2009 timeframe. Aventine should be able to raise a secured credit facility that would allow the Company to emerge from bankruptcy while preserving shareholder value and ownership. This facility would be used to pay-off the existing DIP facility, the existing credit facility, all accrued interest, and all other liabilities subject to compromise as required. Aventine needs approximately $100-150 million to fund these exit payments. The Company's 10% Notes could be reinstated and would emerge from the reorganization unimpaired.
As mentioned above, Aventine needs approximately $100-150 million to exit from bankruptcy and an additional $70-100 million to complete the two ethanol plants under suspended construction. The $170-250 million total requirement could be funded with a new secured credit facility that would be structurally senior to the unsecured 10% Notes. The indenture governing the 10% Notes seems to allow for secured indebtedness of at least $300 million. Even at the high-end requirement of $250 million, a new secured facility would be leveraged less than 1.5x debt to EBITDA at recent margins and less than $0.60 per gallon of capacity, relative to replacement cost exceeding $2.00 per gallon.
Upon completion of the new plants, Aventine would have total pro forma net debt of $500 million, comprised of a $250 million secured exit facility, $300 million of existing 10% Notes, and approximately $50 million of cash and equivalents. Pro forma net debt could be as much as $100 million lower, or a total of $400 million, depending on variables including the potential reinstatement of certain liabilities subject to compromise, remaining capital costs, free cash flow generation, utilization of tax losses, recapture of restricted cash, savings from prepaid utilities, and potential proceeds from auction rate securities litigation. Even at the high estimate of $500 million, net debt would be a modest 2.5x EBITDA at recent margins and $1.15 per gallon of capacity. These credit metrics are roughly in-line with public industry comparables, particularly after adjusting for the superior profitability of Aventine's 100 million gallon wet mill facility. In this scenario, Aventine could generate close to $100 million of annual free cash flow after all interest, tax, and maintenance capital requirements, suggesting that a new secured facility could be fully amortized after only a few years. Even if ethanol margins decline 50% from recent levels, Aventine would have a manageable capital structure and generate substantial free cash flow.
The analysis above includes the following pro forma assumptions: 433 million gallons ethanol capacity and production, 50 cents per gallon plant-level EBITDA margin, $15 million corporate expense, $40 million depreciation expense, 10% average coupon on $500 million net debt, 35% tax rate, and $12 million maintenance capital expenditures. A full cash tax rate is assumed despite substantial tax loss carryforwards that are likely available to Aventine. Based on information available through Bloomberg, spot margins are now materially higher than the 50 cents per gallon assumption, which therefore implicitly includes a contingency against potential margin contraction. As of the date of this letter, I calculate average spot plant-level EBITDA margins of 75 cents per gallon for Aventine based on the following commodity price and processing assumptions: $2.19 per gallon ethanol benchmark, zero ethanol basis differential, $3.61 per bushel corn, zero corn basis differential, 2.70 gallons per bushel corn yield, 35% co-product recapture, $0.10 per gallon freight expense, $0.17 per gallon utility expense, and $0.30 per gallon other cash conversion costs.
My analysis shows that Aventine pre-petition equity has substantial value based on various valuation methodologies. EV/EBITDA Methodology. Based on pro forma EBITDA of $200 million, a typical industrial enterprise value multiple of 8.0x, pro forma net debt of $500 million, and 43 million shares outstanding, Aventine has potential equity value of $1.1 billion, or $25 per share. Even if ethanol margins are cut in half, an 8.0x multiple on $100 million EBITDA suggests potential equity value of $300 million, or $7 per share. Free Cash Flow Methodology. As detailed above, Aventine can generate pro forma free cash flow of $100 million, or $2.30 per share, based on recent margins and approximately $0.80 per share assuming margins are cut in half. Applying a reasonable 10x free cash flow multiple suggests a similar potential equity value range of $8 to $23 per share. Replacement Cost Methodology. Based on $2.00 per gallon of dry mill capacity (pro forma 333 million gallons) and $3.00 per gallon of wet mill capacity (100 million gallons), Aventine's pro forma enterprise value is $966 million. Deducting pro forma net debt leaves potential equity value of $466 million, or $11 per share. Given recent margin strength, a robust demand-growth outlook, and the potential need for additional capacity to meet 2015 RFS mandates, there is a compelling argument that ethanol plants should be worth at least replacement cost. Of note, none of these valuation methodologies attribute any value to potential exit payment or capital cost savings, free cash flow generation, utilization of tax losses, recapture of restricted cash, savings from prepaid utilities, or potential proceeds from auction rate securities litigation. These items could total approximately $100 million, or more than $2 per share. Any way you look at it, Aventine equity appears to have substantial value that can and should be preserved for shareholders.
Aventine filed for Chapter 11 bankruptcy protection on April 7, 2009 due to the confluence of weak ethanol margins and a global credit crisis that is universally described as the worst in generations. Ethanol margins are now strong and the credit markets have recovered. Earnings and capital structure analyses suggest that Aventine should be able to secure a sufficient credit facility to exit bankruptcy and make whole all of the Company's pre-petition and post-petition obligations. Traditional valuation analysis shows that Aventine's pre-petition equity has substantial value, potentially more than $10 per share. Accordingly, the Board has an obligation to use its best efforts to evaluate reorganization alternatives that preserve value for all stakeholders, including shareholders. Aventine and the Board would not be alone in such efforts, as even today there are at least three pending bankruptcy proceedings, including Pilgrim's Pride Corporation, W.R. Grace & Co., and Vermillion, Inc., in which the respective debtor has proposed a reorganization plan that preserves substantial shareholder value. General Growth Properties, Inc. also appears to have a board and management team that are working constructively to preserve shareholder value because of the dramatic recovery in the credit and capital markets since that company's bankruptcy filing, also in April 2009.
The Board should immediately seek to renegotiate or replace the existing DIP credit facility to provide better flexibility and terms to the Company. While the existing DIP facility likely provided the best terms available on the filing date, the $30 million commitment is arguably too low, the April 7, 2010 maturity is arguably too short, and the 16.5% interest rate is arguably too high. Simply put, with the dramatic recovery in both industry margins and the credit markets, substantially better terms are likely now available. The Company could perhaps even obtain a new DIP facility that permits, during the bankruptcy process, the continued construction of one or both of the ethanol plants under suspended construction.
FURTHER OFFERS AND REQUESTS TO THE BOARD
I offer my immediate availability, via phone and email, to the Board and management in order to provide any necessary clarification or to answer any questions regarding my analyses. I also invite any feedback the Board or management might have regarding my analyses. I encourage the Board and management and their various advisors to commence a dialogue with me and other interested shareholders to discuss the matters addressed in this letter. In furtherance of such dialogue, I ask the Board to seek the appointment of an official committee of shareholders as part of the bankruptcy proceedings. I ask the members of the Board, as fiduciaries to all stakeholders including shareholders, to use their best efforts to evaluate the feasibility of Chapter 11 reorganization alternatives that preserve shareholder value and ownership. Finally, I ask that the Company defer from filing any plan of reorganization in advance of completing the requested evaluation. I expect that the Company will file a motion to extend exclusivity, as is not uncommon in such complex cases, beyond the December 5, 2009 expiration to provide sufficient time to complete the requested evaluation.
The analyses contained herein should not be construed as me giving investment advice to any person. I also caution any person against relying on my analyses or the contents of this letter in making any investment decision.
Thank you for your time and consideration.
Andrew Shirley firstname.lastname@example.org 424-832-3993
with copy to: Bobby L. Latham, Chairman of the Board Leigh J. Abramson, Board Member Theodore H. Butz, Board Member Richard A. Derbes, Board Member Farokh S. Hakimi, Board Member Michael C. Hoffman, Board Member Wayne D. Kuhn, Board Member Arnold M. Nemirow, Board Member George T. Henning, Jr., Interim Chief Executive Officer
SOURCE Andrew Shirley