Financing the Commercialization of Biochemicals, Biofuels and - - PowerPoint PPT Presentation

Financing the Commercialization of Biochemicals, Biofuels and Bioproducts

John M. May Managing Director Head of the Alternative Energy Finance Group Stern Brothers & Co.

• St. Louis, MO

4th Annual Next Generation Bio-Based Chemicals Summit January 28-31, 2013 San Diego, CA

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INTRODUCTION

• Stern Brothers, founded in 1917 and headquartered in St.

Louis

• Focus on project financing (taxable and tax-exempt) for

alternative energy, real estate, higher education and healthcare

Atlanta Chicago Cleveland Dallas Denver Detroit Houston Kansas City Los Angeles Reno San Francisco

• St. Louis (HQ)

Seattle Tampa

Locations

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INTRODUCTION

• The Alternative Energy Finance Group is Stern’s largest and most

robust group

• Founded in 2003
• Biofuels, second generation biofuels, biochemicals, waste-

to-energy, biomass, landfill gas-to-energy, cogen, CHP, hydro, geothermal

• Robust pipeline of debt financings over the next 24 months

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HISTORY OF BONDS AND RENEWABLES

• Tax-exempt bonds were used to finance small waste-to-energy, wood

waste and landfill gas to energy projects

• Taxable bonds have been used to finance other types of

renewable projects such as: biodiesel, biomass and CHP

• In 2002, IRS issued PLR recognizing stillage as waste allowing many

corn ethanol plants to be financed with tax-exempt bonds

• Stern pioneered the use of bonds as an important part of the capital

structure for ethanol projects

• Developed buy-side acceptance of ethanol projects from mutual

funds buying high yield tax-exempt bonds

• Bonds can be sole source of debt or a complement to bank debt and
• ffer structural advantages such as longer tenor, lower interest rate and

flexible amortization that improve equity returns

Project Company (Borrower)

Offtake Agreements Feedstock Agreements O&M Agreement EPC Contract

Technology License Agreements

Sponsor Project Level Equity Investors Debt Providers Equity Investors

Typical Project Finance Schematic

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BANK VS. BOND MARKET

Issue Banks Bonds Large Transactions Syndication Risk Access to incremental pool of investor capital Complex Transactions Prefer “cookie cutter” deals Good for “story” credits Timing Slow (9-12 months) Fast (4-6 months) Cost Expensive Cheaper Technology Risk Less likely to accept Ability to mitigate some technology risk and accept residual Construction Risk Will assume with proper controls (IE) Will assume with “bank like” controls Capitalized Interest None Raised at financial close Drawdowns Timed to construction schedule Disbursed at closing (negative carry in steep curve environment) Tenor Shorter (5-7 years) Longer (15-20 years) Interest Rate Higher, Floating Lower, Fixed Rate Covenants More restrictive Less restrictive Amortization Usually straight line or mortgage style Flexible—can be sculpted to match cash flow & meet ratios Cash Sweeps Customary Not customary Prepayments Customary Make whole provisions (call premium)

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Debt 61% Equity/Grants 39%

PROJECTS FUNDED PRE-CREDIT CRUNCH

$29,600,000 Biofuels Company of America Biodiesel Manufacturing Facility Senior Secured Credit Facilities $15,000,000 Illinois Finance Authority Agribusiness Loan Guarantee Sole Arranger 2006

Biofuels Co. of America / Bunge (2006) Capital Structure

Dollars Sources of Funds

(In Millions)

Taxable Senior Bank Debt $24.6 Equity and State Grant 15.4 Total Funding $40.0

Deal Overview

• 40 million gallon per year ethanol plant; merchant off-take
• Stern structured and placed bank debt with Fifth Third Bank
• $15 million of senior debt was secured in first-ever State balance sheet

guarantee

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Debt 77% Equity/Grants 23%

PROJECTS FUNDED PRE-CREDIT CRUNCH

GTL Resources LLC / Illinois River Energy (2007) Capital Structure Deal Overview

• Refinance 50 million gallon per year ethanol plant; merchant off-take
• Stern structured and placed largest sub debt tax-exempt bond for US

ethanol plant

• Bonds were lien and time subordinated; bonds began amortization after

bank debt

$30,000,000 Illinois Finance Authority Subordinate Solid Waste Disposal Facility Revenue Bonds Illinois River Energy LLC Ethanol Project Series 2007 Sole Placement Agent

Dollars Sources of Funds

(In Millions)

Taxable Senior Bank Debt $130.0 Tax-Exempt Sub Bonds 30.0 Equity and State Grant 48.0 Total Funding $208.0

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CHANGES TO TRADTIONAL PROJECT FINANCING

• Well-known, systematic financial problems have dried up funding from

commercial banks

• Debt providers want to see the “Three Pillars of Project Finance”:

Project Financing

Feedstock Off-Take EPC

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Economic Performance

Generates good debt service coverage under stress scenarios. Stable Project returns, with potential for additional upside. Adequate Debt Service Reserve Account.

Sponsors

Experienced & financially strong strategic investors with demonstrated track record of investing & operating similar projects. Ability to provide financial support to Project.

Management

Strong managerial, financial, operational, & technical capabilities with demonstrated track record of implementing similar projects. Continuity of senior management.

Technical Feasibility

Reviewed by independent engineer.

Technology Risks

Perpetual technology licenses & performance warranties.

Construction Risks

Fixed price, date certain, turnkey EPC contract with . liquidated damages. Completion guarantee by Sponsors.

Operations Risks

O&M contract with efficiency bonus provisions. Adequate Maintenance Reserve Account.

Feedstock Supply

Adequacy of available feedstock. Long-term quantity supply agreement.. Long-term fixed price supply agreement (or at least a price ceiling). Adequate on-site storage.

Offtake

Long-term quantity offtake agreement. Long-term fixed price offtake agreement (or at least a price floor). Adequate storage & transportation infrastructure.

SOUND PROJECT ECONOMICS

RISK PROFILE OF WTE PROJECT

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AVERAGE PROJECT RATINGS

Source: Fitch Renewable Energy Forum 6/23/11 Note: Includes Public, Private Ratings and Credit Assessments

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Debt 78% Equity/Grants 22%

PROJECTS IN NEW ERA OF PROJECT FINANCE

Bionol Clearfield LLC (2008) Capital Structure Deal Overview

• 100 million gallon per year ethanol plant; Five-year off-take with Getty

Petroleum

• Stern structured and placed largest tax-exempt senior secured bond for US

ethanol plant

• Bond amortization began after bank debt

$65,000,000 Pennsylvania Economic Development Financing Authority Senior Exempt Facilities Revenue Bonds Bionol Clearfield LLC Ethanol Project Series 2008 Sole Placement Agent

Dollars Sources of Funds

(In Millions)

Senior Tax-Exempt Bonds $65.0 Senior Taxable Bank Debt 110.0 Second Lien Bank Facility 30.0 Equity and State Grant 59.0 Total Funding $264.0

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ADDITIONAL RISKS WTE PROJECTS FACE

• Many advanced WTE projects face additional risks that debt providers

require to be mitigated to some degree

• Technology risk, construction or scale-up risk
• There are various credit enhancement mechanisms that can be

employed to help mitigate these risks

Method Overview Third Party Insurance Insurers with technical expertise and investment grade balance sheets have begun exploring highly tailored technology warranties that may support a bond funded project financing State and Local Government Credit Enhancement State and local governments have a history of supporting alternative energy projects; support ranges from accelerated permitting to “moral obligation” The United States Department of Agriculture Advanced Biorefinery Loan Guarantee Program, B&I Loan Guarantee Program, and the REAP Guarantee Loan Program Export Finance Agency Loan Guarantees Most OECD member countries have an export finance agency; require goods and service to move across borders

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Debt 22% Equity/Grants 78%

PROJECTS FUNDED USING CREDIT ENHANCEMENT

Myriant Lake Providence Inc. (2012) Capital Structure Deal Overview

• 30 million pound per year chemical facility; Off-take agreements for

Project’s nameplate capacity

• Agreement with suppliers for purchase of 95 Dextrose and grain sorghum

grits

• USDA B&I loan guarantee to mitigate technology risk; 60% guarantee

$25,000,000 Myriant Lake Providence Inc. Revenue Bonds $15.0 Mil. USDA Guaranteed Bonds $10.0 Mil. Unguaranteed Bonds Series 2012 Sole Placement Agent

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John M. May Managing Director Head of Alternative Energy Finance Group Stern Brothers & Co. (Office) 314.743.4026 (Cell) 314.583.2130 8000 Maryland Avenue Suite 800

• St. Louis, MO 63105