Vertex Energy filed for Chapter 11 protection last week, with its restructuring advisors citing a “perfect storm” impacting its short-term financial condition and precipitating the bankruptcy filing.
The Alabama-based refiner, which has been in business since 2001, faced a host of operational and market challenges, driven by significant delays and cost overruns in the construction of a hydrogen facility under its contract with Matheson, resulting in liabilities of $251m.
Vertex has filed to reject the Matheson contract through the bankruptcy proceedings after determining that completing the hydrogen facility is no longer in its best interests, according to court filings.
Additionally, the company struggled to meet its renewable volume obligations under the federal Renewable Fuel Standard, leading to $72.3m in projected compliance costs by early 2025. These challenges were compounded by tightening profit margins due to falling prices in the renewable diesel market and volatile crack spreads, which significantly reduced Vertex’s profitability, all while it faced $422.5m in total funded debt obligations.
ReSource previously reported on Vertex’s debt maturities and its engagement of Bank of America to explore strategic alternatives.
The company has reached a restructuring support agreement with consenting term loan lenders which includes two potential outcomes: a Recapitalization Transaction, where Vertex would reorganize its capital structure and emerge as a standalone entity, or an Asset Sale, where all or a portion of Vertex’s assets would be sold to satisfy creditors.
Matheson contract
Vertex entered into an agreement with Matheson on June 11, 2022, for the construction of a hydrogen reformer facility at its Mobile Refinery, which was essential for increasing its renewable diesel production capacity from 8,000 barrels per day (bpd) to 14,000 bpd.
Due to construction delays and cost overruns, the project fell significantly behind schedule. As of the Chapter 11 filing, the Hydrogen Facility was not expected to be completed until late 2025, two years later than originally planned. The delayed timeline and increased costs left Vertex exposed to financial liabilities of approximately $251m tied to the Matheson agreement – compared to an original cost estimate of $60m.
Seth Bullock, the company’s chief restructuring officer from Alvarez & Marsal, wrote in a first-day declaration that a July site visit by company management and its advisors to the Mobile refinery “eroded what little confidence they had left in Matheson’s management of the project, which has, to date, resulted in significant construction delays and cost overruns.”
The construction cost increases for the hydrogen facility under the Matheson Agreement led to a significant rise in the monthly Base Facility Charge. Initially, the Base Facility Charge was set at $1,035,000. However, under the terms of the agreement, for every $1m increase in construction costs beyond the original estimate of $60m, the Base Facility Charge would rise by $13,700. With the total construction costs projected to reach $251m, the monthly Base Facility Charge was expected to increase to approximately $3,654,440, more than tripling the original charge.
Pre-marketing
In the fall of 2023, Vertex Energy engaged BoA to assist in conducting a strategic review process to evaluate potential options for the company amid its growing financial challenges. The review aimed to explore various alternatives, including an investment in or sale of the business, a third-party capital raise, or a potential restructuring. As part of this process, BoA initiated a marketing campaign targeting potential buyers or investors for certain of Vertex’s assets, including the renewable diesel segment of the Mobile refinery.
Between the fourth quarter of 2023 and the first quarter of 2024, BoA reached out to 111 potential parties, shared 81 teasers, distributed 75 draft non-disclosure agreements, and successfully executed 48 NDAs. Despite these efforts, the process did not result in any actionable offers or transactions. However, the process generated significant interest from several third parties, some of whom continued to express interest in Vertex’s assets leading up to the Chapter 11 filing.
