The Name is Bond, part II: Financiers Find Biofuels Financing Options in Bond Market
by Jim Lane (Biofuels Digest) …Although equity investors (primarily strategics and venture capitalists) and the government grant market has continued to participate strongly in biofuels investing, the debt market that typically represents up to 80 percent of commercial scale financing has virtually shut down.
…In project finance, with interest rates in the 6-8 percent range, just a few hundreds of basis points above rock-solid Treasuries or rated corporate debt – banks cannot afford more than a 1-2 percent default rate, else they are driven out of business, or at least into crisis mode. Conversely, 12-15 percent rates that would cover the bank risk, would drive biofuels projects into the ground.
…Biofuels projects have risk all over them. There is feedstock risk – of the type that drove VeraSun Energy and others into bankruptcy and liquidation. There is offtake risk – where uncertain prices at the pump give wildly differing scenarios on how much money a biofuel project can sustainable repay. There is also the “first-of-kind” technology risk. Locked in commodity contracts can help with the market risk of feedstock and off-take, but the technology risk is difficult to get around. As one wag put it, “the bans are lining up to finance everyone’s second project.”
Enter the guarantor. It isn’t much different in theory than a student loan – where the student, though headed for a (hopefully) high-paying job in the future, lacks the credit history or income to justify a high-ticket loan for tuition. So, the guarantor steps in to absorb the risk, usually a family member.
Because biofuels projects cost in the hundred of millions, the “family member” guarantor of choice, in the US, is Uncle Sam – the one with the balance sheet and the policy interest to make commercial biofuels happen.
…4. The investors place the purchase/sales proceeds into an account with the trustee bank. The trustee bank then on-lends the bond proceeds into the project.
5. The USDA and/or DOE, as part of the financing, places the loan guarantee(s) over the bonds.
6. Thus, the generally low-rated bonds essentially would become AAA-rated under the full faith and credit of the US government.
READ MORE including Presentation: Financing Biomass-to-Power and Advanced Biofuels March 2010 by Mark Riedy (Mintz Levin)