PTRA - Proterra: Stuns Investors With Surprise Bankruptcy Filing - Sell

2023-08-07 22:44:50 ET

Summary

• After the close of Monday's session, battery systems and electric transit bus manufacturer Proterra Inc. stunned investors with a bankruptcy filing out of left field.
• Following the successful restructuring of the company's convertible notes earlier this year, the move comes as a surprise.
• Apparently, the company is looking to separate the legacy transit bus operations from the battery and charging solutions segment ("Proterra Powered & Energy") and pursue a recapitalization or sale.
• Regardless of the company pursuing a recapitalization or a sale, a recovery for existing equity holders looks highly unlikely at this point.
• Considering the very real risk of a wipeout, I would advise existing shareholders to sell existing positions and move on.

Note:

I have covered Proterra Inc. ( PTRA ) previously, so investors should view this as an update to my earlier article on the company.

After the close of Monday's session, battery systems and electric transit bus manufacturer Proterra Inc. or "Proterra" stunned investors with a bankruptcy filing out of left field (emphasis added by author):

Proterra Inc (...) today announced that the Company is taking action to maximize the value of its business and enhance the potential of each of its product lines. To do so, Proterra has voluntarily filed for protection under Chapter 11 of the U.S. Bankruptcy Code in the District of Delaware in an effort to strengthen its financial position through a recapitalization or going-concern sale. The Company intends to continue to operate in the ordinary course of business as it moves through this process and plans to file the customary motions with the Bankruptcy Court to use existing capital to fund operations, including paying employee salaries and benefits, and compensating vendors and suppliers on a go-forward basis in accordance with Chapter 11 rules, all while ensuring business continuity for customers.

“Proterra is at the forefront of the innovations that are driving commercial vehicle electrification. We know we’re building industry-leading products that our customers want and need,” said Gareth Joyce, Proterra CEO. “The foundation we have built has set the stage for decarbonization across the commercial vehicle industry as a whole, and we recognize the great potential in all of our product offerings to enable this important transformation. This is why we are taking action to separate each product line through the Chapter 11 reorganization process to maximize their independent potential .”

“While our best-in-class EV and battery technologies have set an industry standard, we have faced various market and macroeconomic headwinds, that have impacted our ability to efficiently scale all of our opportunities simultaneously. As commercial vehicles accelerate towards electrification, we look forward to sharpening our focus as a leading EV battery technology supplier for the benefit of our many stakeholders ,” said Joyce .

(...)

While I expected the company to default on its convertible debt back in March already, Proterra actually managed to amend covenants and extend the maturity date of the notes shortly after my article was published.

In addition, the company ended the first quarter with almost $300 million in cash and cash equivalents and $43 million in available capacity under its asset-backed loan facility, well above the $125 million minimum liquidity covenant governing the convertible notes.

That said, Proterra projected substantially increased cash usage going forward and was exploring options to raise additional capital:

Notwithstanding our improvements in working capital management, expense reduction and cash savings initiatives and the recent amendment to our Convertible Notes, there continues to be a risk that we cannot meet our future financial obligations as they become due within one year. We are therefore exploring potential options to raise new capital.

(...)

Cash usage in Q2 2023 is expected to grow substantially from Q1 2023 levels, as further investments in battery cell and other inventory will be required to prepare for our planned battery production growth into the second half of the year

At the end of Q1, outstanding debt principal amounted to $173.3 million thus leaving Proterra with a net cash balance of $122.9 million.

Quite frankly, I have no idea what might have caused the Board of Directors' abrupt decision to file for bankruptcy just six days after scheduling the company's regular quarterly conference call and without any sort of agreement with creditors in place.

With the vast majority of the convertible notes held by funds associated with TD Cowen, negotiating a restructuring support agreement should have been a manageable task but it will likely require a closer look at the court dockets to get a better impression of what happened at Proterra recently.

Apparently, the company is looking to separate the legacy transit bus business ("Proterra Transit") from the battery and charging solutions segment ("Proterra Powered & Energy") and pursue a recapitalization or sale.

At this point, my best bet would be the spin-off of the transit bus operations into a virtually debt-free private company with Proterra contributing a certain amount of working capital while the Powered & Energy segment is likely to pursue equitization of the company's existing debt in combination with securing sufficient exit financing to fund the business model.

Given Proterra's intent to operate in the ordinary course of business and considering substantial fees to be incurred over the course of the bankruptcy process, cash usage is likely to remain material.

To be perfectly honest, I am having a hard time envisioning a recovery for existing equity holders as I would expect the new equity of the restructured company to be allocated to existing convertible noteholders and providers of new capital.

Assuming a sales process pursuant to Section 363 of the U.S. Bankruptcy Code, I would expect the Cowen funds to leverage their debt holdings in a potential credit bid for the Powered & Energy segment thus also resulting in existing shareholders being wiped out.

Bottom Line

Following the successful restructuring of Proterra Inc.'s convertible notes earlier this year, Monday's bankruptcy filing caught market participants flat-footed.

Investors should note that even after the 65% crash in after hours, the company's market capitalization still calculates to approximately $115 million.

In addition, I would expect Nasdaq to commence near-term delisting proceedings.

Considering the very real risk of a wipeout, I would advise existing shareholders to sell existing positions and move on.

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