Item 2.03. Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
On May 30, 2023, OPAL Sapphire RNG LLC, a wholly-owned indirect subsidiary of OPAL Fuels Inc. (the “Company”), contributed all of its membership units (the “Sapphire RNG Interests”) of Sapphire RNG LLC (“Sapphire”) to OPAL Paragon LLC (“OPAL Paragon”), a wholly-owned indirect subsidiary of the Company, in exchange for membership units in OPAL Paragon. Concurrently, OPAL Emerald RNG LLC, a wholly-owned indirect subsidiary of the Company, contributed all of its membership units (the “Emerald RNG Interests”) of Emerald RNG LLC (“Emerald”) to OPAL Paragon in exchange for membership units in OPAL Paragon. In turn, OPAL Paragon contributed the Sapphire RNG Interests and the Emerald RNG Interests to Paragon RNG LLC (“Paragon”), a joint venture holding company owned indirectly 50/50 by the Company and a third-party environmental solutions company. Sapphire and Emerald are existing renewable natural gas projects that are now wholly-owned by Paragon. After giving effect to the transactions described in this paragraph, the Company’s indirect ownership of Sapphire and Emerald remains unchanged.
On May 30, 2023, OPAL Fuels Intermediate Holdco 2 LLC (“OPAL Intermediate Holdco 2”), a wholly-owned indirect subsidiary of the Company, assigned to Paragon its rights and obligations under its existing senior secured credit facility (the “Previous Credit Agreement”), entered into on August 4, 2022, among OPAL Intermediate Holdco 2 as the borrower, direct and indirect subsidiaries of the borrower as guarantors, the lenders party thereto, Bank of Montreal as the administration agent, and Wilmington Trust as collateral and depositary agent, and amended and restated the Previous Credit Agreement (as so amended and restated, the “Credit Agreement”).
The Credit Agreement provides for an approximately two-year delayed term loan facility (the “DDTL Facility”) of up to a maximum aggregate principal amount of $85.0 million and a debt service reserve facility (the “DSR Facility”) of up to a maximum aggregate principal amount of $10.0 million. The proceeds of the DDTL Facility will be used to fund a portion of the construction of the Sapphire and Emerald projects and the proceeds of DSR Facility are to be used primarily to satisfy the balance to be maintained in the debt service reserve account. Paragon is the borrower under the Credit Agreement (the “Borrower”) and Sapphire and Emerald are guarantors (the “Guarantors”). At the closing, Paragon drew down $18.5 million from the DDTL Facility to be used for construction costs associated with Emerald as well as to pay closing fees and expenses. No funds had been drawn from the Previous Credit Agreement.
The outstanding borrowings under the Credit Agreement bear interest at the benchmark rate of adjusted Term SOFR plus (i) for the period from closing to the earlier of the date of completion of construction of the Sapphire and Emerald projects or June 30, 2024 (the “Conversion Date”), a spread of 3.5%, and (ii) thereafter a spread of 3.75%. Accrued interest on amounts outstanding under the DDTL Facility must be paid on the last day of each applicable interest period. The outstanding principal amount of the DDTL Facility is subject to quarterly amortization payments commencing September 30, 2024 equal to 2.5% of the aggregate principal amount of the outstanding term loan balance as of the Conversion Date, subject to adjustment based on certain mandatory prepayments, with the balance due at maturity. The DSR Facility is due at maturity. The Credit Agreement matures on May 30, 2028.
The Borrower’s and the Guarantors’ obligations under the Credit Agreement are secured by substantially all of their personal property assets and by a non-recourse pledge of the membership interests of the Borrower.
The Credit Agreement requires the Borrower to maintain a consolidated debt service coverage ratio of not less than 1.2:1.0, as tested on a trailing four fiscal quarters basis as of the last day of each fiscal quarter commencing as of the Conversion Date.
The Credit Agreement includes certain customary and project related affirmative and negative covenants, including restrictions on distributions, and events of default, including payment defaults, breaches of covenants, changes of control, materially incorrect or misleading representations or warranties, bankruptcy or other events of insolvency, and certain project related defaults.