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https://www.bleeckerstreetresearch.com/research/pct-update
Introduction
Two weeks ago, we published an initial report on PureCycle Technologies (PCT), demonstrating that the company's Ironton facility in Ohio was operating at a substantially lower level than expected by the market. On the November 8 earnings call, PureCycle conceded production shortfalls and disclosed a planned two-week shutdown in the second-half of November to make a multi-million dollar repair.
Immediately following our report, in an apparent attempt at misdirection, PureCycle announced it had made its first shipment to Formerra. This press release (notably not an 8-K) prompted a 15% gain on the day.
The excitement was short-lived, when PureCycle reported earnings on Tuesday night, it announced it had only "processed" 409,000 pounds of feed, producing just 100,000 pounds of pellets (implying less than 25% yield). It also disclosed that it was shutting down the facility to make a multi-million dollar last-minute design change.
PureCycle has faced a string of operational issues since the commencement of the Ironton project, in part due to "the war in Ukraine, COVID-19, supply chain issues, and low water on the Mississippi River," among other things. The PureCycle faithful believe that these issues are behind them and that PureCycle is on the precipice of becoming the world's pre-eminent supplier of recycled polypropylene.
Having negotiated waivers of default twice since the municipal bond issue in October 2020. END
Since the force majeure claim following the power going out, bulls have been waiting for production to begin. Now PureCycle is on the verge, but first it has to stop everything for two weeks and fix one more thing. Then, it will begin a sprint into year-end, it must run at 50% of nameplate capacity in December and 100% by April to avoid default.
Unlike many pre-revenue companies, missing these milestones is a real problem. That is because PureCycle has financed much of its facility with debt, and the terms of this debt are onerous. More than just missing guidance, if PureCycle is not able to run at 50% of nameplate capacity in December, we believe that could be the spark that lights the tinderbox of PureCycle's debt-heavy capital structure.
Disclosure: We remain short shares of PureCycle Technologies (PCT), please see full disclosure below.
Key Points
PureCycle's market cap is currently $640 million, with an enterprise value of ~$1 billion. Everything is collateralized, even future equity and debt issuance has to pay back bondholders first. We believe the equity is a zero.
PureCycle is encumbered by brutally constrictive municipal debt. PureCycle's municipal bonds require the company to hit 4.45 million pounds of production (50% of nameplate capacity) over one month by December 31, and 100% by April 2024. We do not believe PureCycle will be able to achieve these numbers, putting the company at risk of imminent default.
All assets of the Ironton project, inclusive of the IP license from P&G, feedstock and offtake agreements and any and all revenues derived from the project are collateralized against the Ironton bonds.
PureCycle has already been so close to default on Ironton bond obligations that its largest shareholder, Sylebra Capital, had to provide it with a $150mm revolving credit facility to facilitate a default waiver.
PureCycle lost two key feedstock agreements, which have been replaced with an inferior quality feedstock contract. Likewise, the company has had to replace a key offtake agreement with a contracted partner who isn't obligated to take any of the plant's pellets for at least 6-12 months.
PureCycle's investors believed the company's Ironton, Ohio plant was operating at higher rates than it has been. PureCycle has so far been able to produce 100,000 pounds of pellets from 409,000 pounds of feed processed. What has been produced does not meet the terms of PureCycle's offtake agreement.
Despite this, holders of PCT's common equity are relying on the company producing nearly 150,000 lbs per day in December, immediately following a two-week shutdown and facility design change in order to escape impending default.
During its sprint to achieve this milestone (and the all important equity unlock for management and legacy shareholders) PureCycle has lost its Senior Health and Safety Manager and Lead Mechanical Integrity Engineer.
Third-Party Construction Monitor reports show that milestones that should have occurred in the week following the initial production run in June are now over 130 days behind schedule, with the most complex deadlines remaining. A separate independent engineering report projects that it will take 9-12 months to get from initial commercial production to full-scale, mature production.
If PureCycle is unable to sell Procter & Gamble polymer at "petro-competitive pricing," its licenses to its core IP become non-exclusive, meaning any aspiring polypropylene recycle could license the IP that is core to PureCycle's existence as a company.
We suspect management's refusal to discuss butane as its solvent in the recent earnings call is due to its concerns that its bonds may not be entitled to ‘green' status if the company is burning millions of pounds of this carbon-intensive fossil fuel each year.
Given the points above and the facts outlined in this report, we believe PureCycle is at risk of imminent default, and that the value of assets attributable to common equity holders in a default scenario is effectively zero.
Posted In: PCT
