by Tim Sklar (Biofuels Digest)  …The purpose of this three-part article is to provide project sponsors and developers of advanced bio-refinery projects with information and guidance in order to improve their prospects for obtaining project financing. It is believed that project developers’ have a better chance of winning financial support for their projects: if they anticipate concerns that potential financial backers may have; if they fully disclose the risks that are inherent in undertaking the project; and if they provide potential financial backers with answers and possible solutions for mitigating  these risks.

Part 1: On Identifying Risks This Part includes discussions that focus upon the high risk nature of bio-fuels projects and more specifically on advanced bio-refinery  projects. It also presents reasons why financing is hard to obtain while offering suggestions as to what can be done to improve the odds.

Why Advanced Bio-refinery Projects Are Hard to Finance

Project Complexity Typically, an advanced bio-refinery project is a complex undertaking. Most are start-up ventures in which the teams of people involved in the project are new to each other and to the fuels industry and/or the biomaterials supply chain they are depending upon. …

Technology Still Evolving …In addition, competing advanced bio-refinery designs may make the installed technology less economic, precipitating a shorter useful life.

Uncertainty in Bio-Fuels Demand and Prices Fuels markets served are subject to events in world markets and prices received for bio-fuels could be subject to calamitous declines.

Uncertainty in Bio-Feedstock Availability, Cost and Yields Bio-feedstock prices are subject to unrelated supply-demand forces, causing instability in supply continuity and cost. …

Erratic Government Support … If adequate net cash flows are dependent on special tax breaks which could be suddenly curtailed or phased out, investors may not be willing to support the project, if their return on equity could become inadequate. …

Valley of Death Challenges

Project Sponsor’s Capabilities Uncertain …

Project Sponsor’s Financial Strength in Doubt …

Project Sponsor Not Making an Adequate Case …

If the Bio-refinery project’s prospects for being able to cross the “Valley of Death” are dubious, venture capital firms, institutional investors, private investors and commercial banks that could provide bridge loans will not commit to support such projects. And who can blame them.

What Can Be Done to Improve The Odds

Anticipate Questions Being Asked by Investors and Lenders …

…Investors will want to be offered a compelling deal in which they can recover their initial investment quickly and participate in higher than average returns over a relatively short period of time. They will also want to be offered an opportunity to cash-out after that period, and receive a value in termination that reflects some of the expected future earnings potential beyond the termination date. …

Addressing a Project’s Known-Known’s, and Known-Unknowns …

Trying to quantify a project’s  “Unknown-Knowns” or “Unknown-Unknowns” and trying to use them in projections is not possible by definition, as one does not know what one should know or can’t possibly know.

But it is most important in this context to identify a project’s “known-unknowns”, as these variables exist, but are not quantifiable with certainty. We must treat them as sets of probable values that could occur and use sensitivity tests to see how outcomes are impacted. …

Focus on known-unknowns that could be Deal Breakers …

Prepare Demonstrations To Help in Risk Mitigation …

•    Develop What-if Questions …

•    Quantifying risks using financial modeling …

•    Obtain Better Information and Documentation …  contingency plans…

•    Obtain Additional Backing and Assurances …

•    Revise Strategies and Business Plans …

•    Provide Answers When Preparing Applications for Financial Support …

Often business plans contain a SWOT analysis section where a project’s “Strengths, Weaknesses, Opportunities and Threats” are presented. The discussions on known-unknowns and the risks they pose as Deal Breakers should be included under the section titled “Weaknesses”.  READ MORE See Part 2 of the series See Part 3 of the series

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1. The Name is Bond, part II: Financiers Find Biofuels Financing Options in Bond Market
2. Biofuels Digest Publishes 5-part Series on the New Rules for Financing Bioenergy
3. The Biorefinery Project of the Future: A 10-Part Series
4. The Song That Never Ends: the Financing of Cellulosic Ethanol
5. Waiting for Godot: The Financing of Commercial Scale Advanced Biofuels