Reorganization and Investment Opportunities in the Ethanol Industry

By Bradley R. Kruse | March 16, 2010
The recent successful Chapter 11 reorganization of Pine Lake Corn Processors LP, an ethanol production facility in Steamboat Rock, Iowa, demonstrates the significant protections and benefits provided by the Bankruptcy Code for businesses experiencing financial difficulties, and the improved overall strength of the ethanol industry.

In December 2008, having lost its operating line of credit, and with poor crush spreads leaving little or no profit margin, Pine Lake was forced to cease production and file for protection under Chapter 11 of the Bankruptcy Code. However, through the hard work and loyalty of its employees and management, coupled with improving crush spread margins and the cooperation of certain of its creditors, Pine Lake was able to use the tools provided by the code to promptly restart its production of ethanol and to ultimately complete a successful reorganization of its business.

A key component to Pine Lake's success and one of the cornerstones of bankruptcy law are the automatic stay provisions, which generally prevent creditors from taking any action to collect a debt against the debtor or to obtain possession of the debtor's property. The benefit of the automatic stay is that it provides debtors with much needed breathing room in order to allow them to reorganize their business affairs, restructure their financing arrangements, and seek new investments. Because of the automatic stay, Pine Lake was afforded the opportunity to delay payment on outstanding unsecured debt obligations and continue its business operations while crush spreads and its cash flow improved.

Another key component is the executory contract provisions which allow a debtor to reject (i.e., terminate) existing contracts which the debtor deems unfavorable or unprofitable. In Pine Lake's case, these provisions enabled Pine Lake to reject a number of unprofitable forward contracts for the purchase of corn.

The code also contains provisions that require parties to promptly pay the debtor any outstanding debts or otherwise to turn over to the debtor any of the debtor's property. These provisions were especially helpful to Pine Lake in expediting the payment of various large receivables that provided much needed operating capital.

Other provisions of the code enable a debtor to propose a plan of reorganization that extends the maturity date and/or changes interest rates or any other terms of outstanding securities. Pine Lake used these provisions to modify the maturity dates and interest rates of its loan and credit facilities, thereby providing it with significantly increased cash flow.

In addition, many other provisions in the code provide troubled companies with powerful tools with which to solve their financial difficulties. Other provisions also provide potential investors or purchasers of assets with benefits and protections not available outside of bankruptcy, such as the ability to purchase assets free and clear of existing liens, claims and encumbrances. With crush spreads much improved over what they were in late 2008 and early 2009, there is improved opportunity and options for ethanol producers experiencing financial difficulty to successfully reorganize their businesses, as well as for potential investors and purchasers of ethanol assets to utilize provisions of the Bankruptcy Code to their advantage.

Bradley R. Kruse is a member of the bankruptcy and renewable fuels practice groups at BrownWinick Law Firm, and was lead reorganization counsel to Pine Lake Corn Processors in its Chapter 11 reorganization. He can be reached at (515) 242-2460 or brk@brownwinick.com.