Ethanol Industry Financing Challenges Continue

By Michael L. Weaver | July 08, 2009
Financing of the nation's ethanol industry continues to fluctuate months after VeraSun Energy Corp.'s bankruptcy sale of seven ethanol plants to Valero for $477 million in cash, or 61 cents per gallon. Even AgStar Financial Service's recent financed sale of two former VeraSun Nebraska plants at 82 cents per gallon of long-term debt, is well off the $3 to $4 per gallon (or more) highs of 2006. With positive operating margins continuing to elude many producers, ethanol companies whose capitalization was based on higher valuations are finding themselves out of covenant compliance and unable to earn or make principal payments. Although bankruptcy filings continue for some highly-leveraged plants, ethanol companies with more moderate debt levels (70 cents to 80 cents per gallon) are restructuring loans with existing lenders. However, with Washington's uncertainty over the second stage of the renewable fuel standard, the E10 blend wall and pending climate-change legislation, near-term financing challenges for many ethanol producers could prevent them from capitalizing on the next generation of renewable energy production in the U.S.

Loan Restructuring Considerations
When restructuring your loan, keep in mind the bank's perspective. Loan policies adopted by the bank combined with increased regulatory scrutiny by examiners means that your loan classification is at the top of your banker's concerns. Once your loan starts climbing in classification, the hurdle to bring it back down is higher than it was going up. With capital reserves for bad loans on the rise, your loan classification is a key issue for your bank. Ironically, a loan to a new borrower (on the same terms that you are requesting in your workout) is easier to classify as a performing loan than your restructured loan. This "clean-slate" analysis works against existing borrowers with troubled loans, and will likely require a re-capitalization plan to provide some credit enhancement advantage over new borrowers.

You must also consider the financed sales taking place on former VeraSun or other bankrupt company facilities. Recent financed sales in the 80 cent- to 90 cent-per- gallon range means that write-downs or reclassifications of loans for existing borrowers to levels below that range are unlikely. With lenders also providing operating loans to buyers, buyers have purchased facilities with equity in the neighborhood of $5 million per 50 MMgy of production. Existing ethanol companies looking to restructure their loans will be well-served to keep in mind these bank perspectives and current sales and financings when formulating their own recapitalization plans.

Considering these factors, borrowers should view additional equity or other credit enhancement on the balance sheet as the key condition of a successful loan restructuring. Further, existing management should focus on operational, marketing and other competitive strengths that they bring to the assets and ultimately to the repayment of the loan. Armed with these tools, companies can approach lenders with forbearance requests, interest-only payments, covenant simplifications and adjustments, and excess cash flow and waterfall adjustments. Of course, strong working capital balances remain the cornerstone of any restructured loan and recapitalization plan. Lenders are looking for longer-term solutions to their ethanol loan portfolio. Be realistic in your objectives, keep your recapitalization plan simple, and offer them the long-term solution. You can turn lemons into lemonade in today's ethanol industry financing market.

Michael Weaver is chair of Lindquist & Vennum's Agribusiness and Energy practice, which has been involved in the financing and construction of 1.6 billion gallons of U.S. biofuel production. He can be reached at mweaver@lindquist.com.