AMRC - Ameresco: Aggressive Covenant Amendments Show That Lenders Are Monitoring Closely

2024-01-15 07:59:09 ET

Summary

• Ameresco is facing solvency and liquidity issues, as evidenced by lenders amending a credit agreement and pushing for a capital raise.
• The company's debt growth continues to outpace cash flows, with $1.4 billion in debt and a leverage ratio above 10.
• Ameresco's options for financial survival include refinancing with aggressive lenders, selling assets, or restructuring in Chapter 11, but all options pose significant challenges.

We believe things are rapidly deteriorating at Ameresco in terms of solvency and liquidity issues. We noticed in December that the lenders amended a credit agreement and included a covenant that pushed for an aggressive capital raise to repay them. This is clearly a sign that the dangerous mix of years of negative cash flows and consistently depressed EBITDA is putting some pressure on lenders. We think that the months ahead will be hard for Ameresco and its stock price.

How Ameresco got here

We covered the Ameresco ( AMRC ) story back in September 2023. We provided a brief explanation of what the company does, and why we thought it deserved a sell rating. Since then, important things happened, and we will explain how the company got here, to a potentially dangerous debt covenant amendment.

The third quarter earnings showed no slowdown in debt growth driven by large infrastructural investments in energy assets. As we explained, Ameresco owns and operates energy production plants from which it generates cash flows.

However, given that rates - and thus the cost of debt - sharply increased in 2023, we expected a slowdown or at least a stabilization of spending. More than 100% of these expenses were debt-funded, as operating cash flows remained well into negative territory. So what does the balance sheet look like?

Well, we have around $1.4 billion in debt with $100 million of liquidity. $400 million of those obligations are classified as short-term, which is 4 times the liquidity available to repay them. But as we noticed this, so did the lenders, and they took action. Around mid-December, Ameresco filed an 8-K disclosing an amendment to its term loan agreement to extend maturity but also include stricter covenants. The new agreement extends maturity to February-April 2024, but puts a deadline of January 31, 2024, for the completion of the project.

If the project is not completed by the end of this month, the agreement forces Ameresco to raise $100 million of fresh equity or junior debt financing. This is clearly an assurance that: (1) the lender is repaid by shareholders/other debt holders, or (2) has a valuable asset as valuable collateral to repossess and sell.

What could happen next: refinance, scale down, or die

Now, it’s quite clear that push came to shove for Ameresco. The company now needs to fight to safeguard its future financially, and we think there are three main ways to do so: (1) refinance with more aggressive lenders, (2) sell assets and scale down, or (3) restructure in Chapter 11. Of course, management has all the intentions to try the first two options before an in-court restructuring, and shareholders definitely prefer those two. However, we see significant challenges for both resolutions 1 and 2.

First of all, lenders that may be willing to provide financing at more than 10x times EBITDA are probably requiring extremely aggressive terms. While it is true that the company has collateral to put up, we believe it has already reached its maximum limit of LTV. Right now, using the cost of assets, the LTV of their energy assets is around 87%.

So there is the second option: sell down assets. Again there are significant issues here, which have also been addressed by management in the latest earnings call in November:

So look, I think that was really designed as a reminder that this is part of the business model that we will look to sell assets. I think as I talked about last quarter, with higher interest rates, we're starting to see a little bit of challenge in the levered IRR targets that we have. And as you know, some of these assets take a while to sort of make their way through the asset and development metric into something that's in operation.

So two key issues: (1) high rates pushing valuations into depressed IRR territory, and (2) the assets are still maturing to reach a consistent run rate. So this leaves Ameresco with the chance to sell down assets to survive, but only at bad returns on investment. Either way, shareholders will be harmed.

Another way out? The bull case

To make our thesis unbiased, we always include the contrarian scenario. In this case, there are some idiosyncratic tailwinds that could save AMRC from its current financial situation. First of all, an acceleration and consistent improvement of the operations of the assets could generate favorable selling conditions faster than expected. This also includes completing projects on time and thus avoiding the breach of covenants under the amended credit agreements. As per the operating assets, achieving a satisfactory run rate soon enough could spur interest in acquirers who may agree to better terms.

The other main positive outcome may arise from improving macroeconomic conditions. This is mainly about decreasing interest rates translating into higher valuations for their assets. This will be also met by a lower cost of financing, which will benefit also refinancing conditions.

Conclusion

We already shared our bearish view of the company in September, and we stand by our conclusions after seeing new negative developments affecting the company. An aggressive loan amendment is signaling that lenders are watching closely, and the overall conditions leave very little room for solutions. We expect that shareholders will be harmed to safeguard creditors in the next months.

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