NEW YORK CITY --
A Louisiana lumber town has become the crossroads for an unusual
buyer and seller in the U.S. municipal market: private-equity firm KKR
& Co. and the world’s biggest manufacturer of wood pellets.
A Louisiana public authority last month issued $140
million of unrated bonds for German Pellets GmbH, which runs plants in
Austria and Germany that make specialized wood pieces used for heating
and power production. KKR’s asset-management group bought the sale’s $95
million taxable portion, said Kristi Huller, a spokeswoman. The
securities were priced to yield 12.2 percent, data compiled by Bloomberg
show.
The deal shows the municipal market’s growing reach
beyond U.S. borders. In April, an Iowa agency sold a record amount of
muni junk bonds for a fertilizer plant being built by Egypt’s biggest
publicly traded company. KKR, run by billionaires Henry Kravis and
George Roberts, joins non-traditional buyers such as hedge funds that
entered the market this year after Detroit’s bankruptcy helped fuel the
biggest losses since 2008.
“There’s much more of an international component in
the high-yield project-finance municipal market, and you’re seeing
different people come in,” said Bill Black, who runs Invesco Ltd.’s $5.7
billion high-yield muni fund from Downers Grove, Illinois. “Our
business is becoming more broad and needs to be more sophisticated than
perhaps it has been in the past.”
Tougher Scrutiny
Junk-debt investors are used to scrutinizing bonds for
industrial development, particularly those without a rating, because
they represent the most defaults in the $3.7 trillion municipal market.
Local agencies issue the debt for companies, hospitals and nonprofits,
which back the obligations.
The novelty of Louisiana’s pellet plant made it
tougher to analyze and drove yields higher, said Black, John Miller at
Nuveen Asset Management and Dan Solender at Lord Abbett & Co., who
oversee high-yield funds. Wismar-based German Pellets, a privately owned
company, borrowed $187 million in 2012 using bonds issued through a
Texas agency for its first U.S. location, in Woodville, Texas.
The company’s 334-acre site near Urania, Louisiana,
will initially produce 500,000 metric tons (551,000 tons) of pellets a
year, with a second phase of financing boosting output to about 1
million metric tons, offering documents show. The pieces will be
delivered to a storage and loading facility 210 miles (338 kilometers)
away in Port Arthur, Texas.
E.ON Agreement
The wood will be shipped mostly to European companies,
including the U.K. subsidiary of E.ON SE. The utility, Germany’s
biggest, has agreed to buy about 480,000 metric tons of pellets annually
for five years starting in 2014, offering documents show.
The pellets are made from dried and densified sawdust,
shavings or wood powder, according to the European Pellet Council, an
industry group. Plant operators can burn the pieces, which are
considered carbon-neutral, along with coal to comply with renewable-energy mandates.
In last month’s bond sale, the $45 million of debt due
in July 2039 that’s tax-free for individuals not subject to the federal
Alternative Minimum Tax was priced to yield 10.5 percent, Bloomberg
data show. That interest rate is almost double the 5.52 percent yield on
benchmark BBB revenue debt.
About $29 million of similar bonds were issued for the
Louisiana plant in March, with a yield of 9.75 percent. The securities
mature in August.
Experience Deficit
“It’s definitely speculative and the yield reflects
that, even more so than some of our traditional high-yield sectors,”
said Miller, co-head of fixed income at Nuveen, which oversees about $90
billion in local debt. “People don’t have a lot of experience around
this sector.”
The variable-rate bonds acquired by KKR mature in
January 2020 and have an 11.5 percent interest rate tied to the London
Interbank Offered Rate, adjusting quarterly, offering documents show.
As part of the terms, KKR Asset Management entered
into an “equity contribution agreement” with German Pellets that
promises that some cash from the subsidiary running the Texas facility
will go toward redeeming the taxable bonds, according to sale documents. New York-based KKR formed KKR Asset Management in 2004 to invest in stocks, bonds and credit strategies.
Predictable Revenue
KKR and its peers, which manage illiquid investments
like private equity and real estate, have diversified since the U.S.
financial crisis to grow their assets and tap more predictable revenue
streams.
Huller, the KKR spokeswoman, declined to comment on
the deal beyond the company’s purchase. Claudia Roehr, a spokeswoman for
German Pellets, didn’t reply to a call and an e-mail seeking comment.
George Longo, who worked on the transaction as a
managing director at Raymond James & Associates in New York, said he
credits the company’s project-finance banking team for the deal.
The plant will produce 80 permanent jobs around
Urania, a town of about 1,300 people that was founded in the 1890s about
245 miles northwest of New Orleans in LaSalle Parish, said Martin
Walke, vice president of economic development at the Louisiana Public
Facilities Authority.
‘Win-Win’
“Urania was established basically as a lumber town,”
he said in an interview. “This project fits right into the core history
of LaSalle Parish: It’s lumber, it’s a renewable resource and it helps the environment. We consider it a win- win.”
Some borrowings for wood-pellet facilities have
failed. The Colorado Housing and Finance Authority issued $7 million of
unrated debt in 2007 for Confluence Energy LLC, a manufacturer that planned to use wood from trees destroyed by beetles.
Confluence defaulted on the securities in 2009, and in
2011 the Internal Revenue Service examined the bonds for compliance
with tax requirements, according to company filings. The debt maturing
in April 2027 priced to yield 6.75 percent, Bloomberg data show.
The European Union has stepped up its goals for renewable energy. It wants to get 20 percent of itsenergy from renewable sources
by 2020, the European Commission’s website says. Those include wind,
solar, hydro-electric and tidal power, as well as biomass, which is what
the pellets are considered. Drax Group Plc, operator of the U.K.’s largest
coal-fired power station, said this year it is accelerating a plan to
convert half of the plant to biomass.
Mandated Demand
Burning pellets releases carbon the trees would
produce anyway when they decompose, preserving the carbon-neutral
status. Offering documents for the Louisiana deal acknowledge demand is
largely driven by government-imposed policies and incentives, and if
those are taken away or a cheaper source ofenergy is found, the buyer base for pellets could “decrease significantly.”
The Louisiana sale was worth buying for
AllianceBernstein LP because of German Pellets’ market share, said Dean
Lewallen, a senior high-yield municipal credit analyst at the company,
which oversees about $31 billion in local debt.
“We’ll definitely see more of these -- the demand in Europe is increasing,” he said. “And the U.S. has a lot of wood.” As the year winds down, issuers are offering $3.3
billion in long-term debt this week, the least for a non-holiday period
in about a year. They’re borrowing with benchmark yields close to the
highest since September.
The interest rate on AAA 10-year munis is 2.95
percent, Bloomberg data show. That compares with 2.89 percent on
similar- maturity Treasuries. The ratio of the yields, a measure of relative value,
is about 102 percent, even with its five-year average. The higher the
figure, the cheaper munis are compared with federal securities.
Copyright 2013 Bloomberg
http://www.renewableenergyworld.com/rea/news/article/2013/12/wood-pellet-bonds-show-us-biomass-market-expanding-worldwide
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