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Rating Action: Moody's assigns B2 rating to Enviva Holdings, LP's senior secured term loan; outlook stableGlobal Credit Research - 12 Feb 2021New York, February 12, 2021 -- Moody's Investors Service, ("Moody's") assigned a B2 rating to Enviva Holdings, LP's (Enviva Holdings) proposed $325 million first lien term loan. Moody's also affirmed Enviva Partners LP's (Enviva Partners), Ba3 Corporate Family Rating (CFR), Ba3-PD Probability of Default Rating (PDR), B1 rating on the senior unsecured notes due 2026 and maintained the SGL-3 Speculative Grade Liquidity Rating (SGL). The outlook is stable.The ratings are subject to the transaction closing as proposed and review of the final documentation."The term loan financing will allow Enviva Holdings to have full control over the future development of projects and provides the necessary capital for new construction that will drop-down to fund growth at the MLP," said Domenick R. Fumai, Moody's Vice President and lead analyst for Enviva Partners, LP.Affirmations:..Issuer: Enviva Partners, LP.... Corporate Family Rating, Affirmed Ba3.... Probability of Default Rating, Affirmed Ba3-PD....Gtd. Senior Unsecured Regular Bond/Debenture, Affirmed B1 (LGD4)Assignments:..Issuer: Enviva Holdings, LP.....Senior Secured Term Loan, Assigned B2 (LGD5)Outlook Actions:..Issuer: Enviva Holdings, LP....Outlook, Assigned Stable..Issuer: Enviva Partners, LP....Outlook, Remains StableRATINGS RATIONALEThe affirmation of Enviva Partners' Ba3 CFR, Ba3-PD, B1 senior unsecured notes rating and stable outlook reflects its leading industry position with an estimated 14% market share in the global wood pellets industry driven by positive fundamentals for the biomass market in Europe and Asia as a result of an increase in renewable energy regulations in order to reduce carbon emissions. Moody's views the current regulatory environment in the European Union and UK as supportive in the medium term. Long-term take-or-pay contracts provide increased revenue and earnings generation visibility and Moody's expects that Enviva Partners will continue to benefit from increased customer diversification in 2021 as some of the new contracts with Asian customers become further accretive to revenues and EBITDA. As a result, Moody's forecasts adjusted pro forma Debt/EBITDA at Enviva Partners to decline from approximately 4.9x in FY 2020 to 4.1x in FY 2021 and remain appropriate for the rating. The company also benefits from its access to abundant and relatively low-cost supply of wood fiber in the Southeast US in close proximity to its manufacturing facilities and transportation.Enviva Partners' rating is tempered by its relatively small scale, though we expect the company to grow over time through drop-downs and new contract awards. Although Enviva Partners benefits from its access to low cost and abundant fiber supply, its significant operational concentration in the Southeast US is another constraining factor. Enviva Partners also faces the risk of adverse changes in the regulatory environment. The company is highly dependent on their customers receiving continued government tax support, tariffs and subsidies in Europe and Asia in order to displace coal with biomass. Other challenges include the threat of technological advances that continue to make other renewable resources more competitive as compared to biomass. Enviva Partners has demonstrated a conservative financial policy using roughly a 50% debt and 50% equity financing to fund drop-downs, acquisitions and capacity expansions. Moody's anticipates that Enviva Partners will continue to finance future drop-downs and potential acquisitions with a significant equity component. However, there are no assurances that Enviva Partners will have access to capital markets in the future which could result in its inability to fund future drop-downs and growth. The company's MLP structure is another consideration that limits the rating as it requires significant distributions to common unitholders.The B2 rating for the proposed $325 million senior secured term loan at Enviva Holdings, LP reflects its stand-alone credit assessment. Pro forma for the additional debt from the term loan financing, Moody's estimates consolidated Debt/EBITDA of 6.7x in FY 2020 and 5.4x in FY 2021, which is more reflective of the "B" category. In addition, Enviva Holdings is highly dependent on the distributable cash flow from Enviva Partners to meet debt servicing including interest expense and mandatory amortization of the term loan. Although the additional debt increases on a consolidated basis, Enviva Partners' continued growth in distributable cash flow should be sufficient to offset the increased debt burden. A further consideration is that while Enviva Holdings has demonstrated a successful track record of project development based on its build and copy approach, which reduces construction risk, there are no assurances that these projects will be completed and fully operational within the projected capital budget.The SGL-3 rating factors Enviva's adequate liquidity supported by modest cash balances and sufficient availability under the $350 million revolving credit facility that will be periodically used to fund drop-down transactions and capex expansions. At September 30, 2020, Enviva Partners had $1.3 million of cash and $214 million of availability under the revolving credit facility including letters of credit.STRUCTURAL CONSIDERATIONSThe B2 senior secured term loan also considers Moody's Loss Given Default for Speculative-Grade Companies (LGD), which essentially views Enviva Holdings level debt as holding company debt structurally subordinated to debt at Enviva Partners, LP. The proposed term loan is secured by all tangible and intangible assets of Enviva Holdings, essentially its ownership of and equity interests in the common units of its subsidiaries and the entities in which subsidiary incentive distribution rights (IDRs) are held as well as the estimated $173 million value of construction projects at Lucedale, Pascagoula and Epes and a $100 million capex reserve account. While the first lien term loan has significant collateral coverage, the value of the collateral would be significantly impaired if Enviva Partners, LP's common unit price deteriorates substantially. The absence of cash flow generating assets, other than distributions from Enviva Partners, is the primary reason why Moody's believes that the secured debt at Enviva Holdings is subordinate to the unsecured debt at Enviva Partners. The senior secured term loan contains a financial maintenance covenant debt service coverage ratio of at least 1.1x.The B1 rating on Enviva Partners' senior unsecured debt, one notch below the Ba3 CFR, reflects its subordinated position with respect to claims on collateral relative to the revolver, which is secured by liens on substantially all of Enviva's assets. Moody's expects the company to generate sufficient cash to meet its capital and minimum distribution requirements and to be in compliance with the restrictive covenants under the secured credit facility.The stable outlook reflects expectations for adjusted Debt/EBITDA of 4.0x by the end of FY 2022, maintaining sufficient liquidity for operations and adhering to a financial policy that utilizes a balance of debt and equity to finance future drop-down transactions and major capital expenditure programs.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSAlthough not likely in the near-term, Moody's could upgrade the rating if Debt/EBITDA including Moody's standard adjustments is sustained below 3.0x, the company maintains a distribution coverage above 1.2x, and experiences further significant organic growth and geographic diversity through new contract awards.The rating could be downgraded if adjusted Debt/EBITDA is sustained above 4.5x, a distribution coverage ratio below 1.0x on a sustained basis, upon a material adverse change in the regulatory environment in the company's key markets, a significant deterioration in liquidity, or a change in the financial policy that includes using more debt in the capital structure to finance drop-down activity or major capital expenditures or a major customer loss.ESG CONSIDERATIONSMoody's considers environmental, social and governance risks into the rating. Enviva's products are considered renewable and sustainable and increased favorable regulation in Europe and Asia requiring lower carbon emissions and increased consumption of renewables benefits the company. Enviva is currently not party to any legal proceeding or investigation regarding environmental damages or remediation. On the social front, Enviva is dedicated to sustainability in terms of forest management, sustainable harvest, and replanting.However, governance risks for Enviva Partners are above average. Although Enviva is a public company with good disclosure and transparency, its MLP structure raises governance risks related to the inherent GP (general partner) conflicts of interest with stakeholders including creditors and common unit holders, as the GP exercises control despite having a minority economic interest. Furthermore, directors are appointed by the GP and are not required to have a majority of independent directors. The MLP structure also constrains the rating as a significant amount of cash flow is distributed to the common unitholders and general partner as well as IDRs (incentive distribution rights) that favor the general partner over the common unitholders.Enviva Partners, LP (Enviva) is a Delaware master limited partnership (MLP) that engages in the production of utility-grade wood pellets. The company aggregates and processes wood fiber into transportable wood pellets sold under long-term take-or-pay supply contracts to major power generators in Europe and Asia who use the pellets in dedicated biomass or co-fired coal plants. Enviva is the largest supplier of industrial wood pellets as measured by production capacity, enjoying an estimated 14% market share of global pellet supply. For the twelve months ended September 30, 2020, the company generated $798 million in revenues.The principal methodology used in these ratings was Manufacturing Methodology published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Domenick Fumai Vice President - Senior Analyst Corporate Finance Group Glenn B. 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