Why did my loan guarantee just die, and what do I do about it?

May 18, 2011 |

It is sunset time for the DOE Section 1705 Loan Guarantee program. What are the alternatives?

In Washington, numerous projects received DOE letters this week that their 1705 applications had been put on hold, and many others have now been rejected.

Last week, DOE loan guarantee czar Jonathan Silver wrote on the DOE’s blog: “We are notifying a group of companies that are farthest along in the [loan guarantee] process that we will be working with them to take the final steps required to complete a loan guarantee. Given the rigorous technical, legal, and financial requirements, it is possible that not all of these projects will succeed by September 30th, but each of them will have a chance to compete for the remaining funding.

“Recognizing that generating an application and supporting it through the review process is both time consuming and expensive,” SIlver wrote,”we are placing a number of other applications on hold. This does not mean they are not quality projects, it simply means other applicants that are further along are more likely to meet the program’s deadline and consume the available funding.”

Silver’s unit had offered $4.8 billion in solar energy loan guarantees and conditional commitments in the month prior to the notices, but during the life of the program had not closed a single loan guarantee for biofuels – though the Diamond Green renewable diesel project had received a $241 million conditional commitment in the past six months.

Well, there’s the, ahem, 1703 program

The DOE indicated in the letter that projects put on hold may be eligible for a loan guarantee under the Section 1703 program, and that the project’s loan guarantee application would continue to be evaluated should the DOE Loan Programs Office have sufficient budget resources. The letter also stated that the DOE is developing a process to allocate existing appropriations under the Section 1703 program for eligible projects that have already applied to the Section 1703 or 1705 programs.

Who died?

Digest sources indicated that 19 projects received the “go” letter, and between 35-60 received the “hold” letter. An unspecified number of remaining projects were rejected.

In a letter to “go” projects, Silver wrote, “we have determined that it will need to be reviewed and recommended for a conditional commitment by our Credit Review Board by June 16, 2011…As you know, in order to complete our diligence and underwriting, DOE has engaged outside advisors. You will continue to be obligated to pay the fees and expenses of DOE’s advisors whether or not your project is eventually approved for a conditional commitment or a loan guarantee.”

In a letter to “hold” projects, Silver wrote: “You may be aware that the FY 2011 Continuing Resolution recently passed by Congress provides an additional $170 million of appropriated credit subsidy under the Section 1703 loan guarantee program, and that projects that have already applied for loan guarantees under Section 1703 or Section 1705 may be eligible for these funds. We are developing a process to implement that provision.”

About that credit subsidy.

The credit subsidy represents the amount that Congress funds the loan guarantee project for prospective loan defaults, which are scored on a 10:1 basis so that $170 million in credit subsidy reflects $1.7 billion in loan guarantee authority under the section 1703 program. Projects that are approved for loan guarantees but do not make it under the $1.7 billion cap will have to fund their own credit risk cost of an additional 10 percent – which in the case of the recent $2.1 billion Blythe Solar Power project would require an additional $210 million in equity funding from the project sponsors.

The surprising winners.

According to Digest sources, not all projects with term sheets were given “go” letters, if the DOE determined that the project in its view would not complete a financial close by the September 30 deadline. However, the Digest has learned that at least some projects that had not yet received a DOE term sheet were on the “go” list. Of course, the big winners were the DOE’s biofuels due diligence contractors, who realized tens of thousands of dollars in fees without the Department of Energy (to date) getting a biofuels loan closed.

Why it’s worse than you think.

According to Digest sources, a number of biofuels projects, including KIOR have now withdrawn from the loan guarantee process. We have not been able to yet confirm that KiOR has withdrawn its application or what impact, if any, this development would have on the company’s proposed IPO. Also according to an unconfirmed report from a Digest source, some people working in the loan guarantee program at the DOE specializing in biofuels have moved to different government agencies.

Why it’s better than you think.

Aside from the Section 1703 program, the USDA continues to have loan guarantee funds and may approve additional LGs after getting several out the door since rules were finalized last July.

Meanwhile, the Digest has learned that there are at least two efforts underway to in some way privatize the loan guarantee process. A group including Citibank has indicated interest in running the loan guarantee program on a private basis for the federal government, with the requirement that the government continue to fund the program. A second effort, in the earliest stages, is looking at the possibility of establishing a “credit enhancement” facility, utilizing an insurance model, where guaranteed projects would contribute premiums towards a self-insurance pool of funds, and private entities or sovereign wealth funds with sufficient balance sheets would provide the loan guarantees.

The Digest’s Take: Get Off the Dope

We have said it before. Biofuels projects – get off the dope of government support. Aside from damage to the industry’s image, the Section 1705 was a serious diversion of time and resources for the industry at a time when it has neither. The only true path to future biofuels commercialization are projects that can show a path to scale independent of federal subsidies, tariffs, and tax credits, especially those which are related to clean energy, carbon, or energy security. Local and state incentives and credits that are generally available for economic development purposes are a different matter, and the Renewable Fuel Standard continues to be an elegant and powerful system for advancing commercial biofuels.

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