But what does the next wave look like – from technology to financing? We explore the trends in our two-part Biorefinery 2015 series.
It’s a remarkable story of expansion. According to a report from Tristan R. Brown and Robert C. Brown at the Bioeconomy Institute at Iowa State University — 266 million gallons in cellulosic biofuels capacity are slated for completion by 2014.
Even more extraordinary? The $2.719 billion in project costs. A tribute to the companies themselves — and their backers — that they were able to raise the capital for first-of-kind technologies — through a combination of loan guarantees, capital from the public markets (in the case of KiOR) and capital from committed strategic investors and private owners.
Long-term, we know that financial structures will change. But how? In our special two-part report this week in the Digest, we’ll look at two significant trends that will define the change in how scale-up and deployment will occur.
Today in Part I, we will look at changing financial structures.
Tomorrow, in part II, we’ll look at a new set of technologies coming along that are redefining our ideas about scale — and the cost of a first commercial pilot and demonstration project as well as costs at scale.
Meet the financiers, investors live at ABLC
This year at ABLC 2013, we’ve assembled a who’s who of the new finance, for live interaction — and real dialogue on the real opportunities. More on ABLC here.
The new strategic equity? Meet Bunge’s Ben Pearcy.
The new venture equity? Meet First Green’s Doug Cameron and Tom Erickson.
The Shape of Finance to come
Citibank’s Michael Eckhart told BusinessWeek recently that alternative forms of financing for next generation biofuels such as the World Bank’s green bonds could be the best way to bridge the funding gap. The fact that they don’t require collateralization and securitization shields investors, which could pave the way for investment in advanced biofuels facilities.
“We see this as a very interesting win-win scenario,” Eckhart said. “The large corporates can be recognized for deploying capital into green purposes and having this capital raised at very reasonable rates in today’s debt markets, and then the biofuels companies would benefit from having much lower cost of capital than they could have raised independently.”
The World Bank has been issuing bonds in the international capital markets for over 60 years to fund its activities. World Bank bonds are issued as liquid benchmark bonds, plain vanilla, local currency bonds, and as structured notes.
For investors, World Bank Green Bonds are an opportunity to invest in climate solutions through a triple-A rated fixed income product. The credit quality of the Green Bonds is the same as for any other World Bank bonds. Repayment of the bond is not linked to the credit or performance of the projects, and investors do not assume the specific project risk. Investors benefit from the AAA/Aaa credit of the World Bank, as well as from the due diligence process of the World Bank for its activities.
Green Bond investors include:
California State Treasurer’s Office, CalSTRS, MMA Praxis Mutual Funds, New York Common Retirement Fund, Sarasin, SEB Ethos rantefund, SEB Trygg Liv, Second Swedish National Pension Fund (AP2), Third Swedish National Pension Fund (AP3), Trillium Asset Management, UN Joint Staff Pension Fund, Adlerbert Research Foundation, AP2 – Second Swedish National Pension Fund, AP3 – Third Swedish National Pension Fund, LF Liv, MISTRA, Nikko Asset Management, Skandia Liv
Total Issuances to Date
Since the inaugural issue in 2008, the World Bank has issued approximately USD 3.5 billion in Green Bonds through 55 transactions and 17 currencies.
READ MORE about Green Bonds here.
The Section 9003 bond structure
“It’s about a paradigm shift to the bond market,” said John May of Stern Brothers, “with recognition from the USDA that this does not pose any greater risk. This opens up hedge funds, pension funds – who have much more sophistication with the credit quality issues than the small system of Ag banks that have adopted the [Business & Industry] program.
Section 9003 is found in Title IX of the 2008 Farm Bill. Section 9003, the Biorefinery Assistance Program, provides loan guarantees for the development, construction and retrofitting of commercial-scale biorefineries, and grants to help pay for the development and construction costs of demonstration-scale biorefineries.
“The bank market simply isn’t there,” May noted. “The biggest untapped market is the bond market – taxable and tax-exempt, that [currently] use the same regulations that the B&I program has.”
John May told us, “we remain very confident that the bond market will be a great source of debt for these sorts of projects. The guaranteed debt is easy to sell. There is interest in non-guaranteed debt, even, the BB or B projects that are well below the bottom of investment grade. It’s not a question of whether the bonds can be sold, but what’s the interest rate.
“Our approach is to combine the guaranteed and the unguaranteed – to come up with a blended interest. If 60 to 80 percent of the debt sold at a 4 or 5 percent rate, because of the guarantee, then there is 20-40 percent unguaranteed, that might have to be sold at 12 or even 14 percent. But the blended rate is still 7, 8 or 9 percent, still great for a valley of death project.
“It’s better than all equity, hands down. That kind of money requires 20+ percent or 30+ percent returns. It’s an extremely expensive form of money – if we come up with a blended solution that is below 10, even if some is at the 12-14 or higher, that’s still way less expensive.”
Risk Transfer Bonds
The Risk Transfer Guaranty Bond uses a “Covered Bond” structure — a technique popular in the 1990s — combining a reserve account and an investment account both funded with cash from the closing proceeds.
- 30 year maturity
- Rated AA or better
- As much as 100% project financing with $10 million minimum size
- Issuer is Bermuda-based exempted corporation – reserves protected by statute
The sweetener for the bond investor is the nature of the coverage of the bond. To use an example, to provide $100 million to a project, $200 million in bonds are issued. $87 million of the net proceeds are invested in Treasury-grade securities and will yield the original $100 million at payback time — ensuring that the investor has zeroed out his capital risk and is only risking the interest that can be earned.
Meanwhile, the investor realizes 4.7 percent on what is, effectively, a guaranteed bond. That’s more than Myriant had to offer on the guaranteed portion of its recent bond issue — and something like 300+ basis points over T-Bills.
The borrower terms are pretty friendly.
• Projected borrower cost is 10% – 12% APR on cash provided • Funding available in 4-6 months • 24 month no payment period – 1st payment is due in the 25th month • Low fee structure – more cash goes to fund the project
Here are the kickers
• Higher investment leverage ratio • No personal or corporate guarantees • Can fund multiple sites and/or multiple projects in the same bond • Versatile and flexible way to finance capital intensive projects • Payments can be deferred for up to 24 months • Financing covenants only “heavy” on “affirmative duty” clauses to prevent fraud and to be certain all necessary taxes are paid
READ MORE about Risk Transfer Bonds, here.
The new Strategic investors
For years, we have seen the emphasis on downstream marketers of petroleum and chemicals as major strategic investors in advanced biofuels. And, for sure, companies such as BP, Shell, Total, Marathon, ConocoPhillips, Petrobras, PetroCanada, Reliance Industries, Sinopec, PetroVietnam, Petronas, and others have been steadily — sometimes spectacularly — in biofuels.
But we’ve seen two shifts in recent years, further upstream.
First, midstream enzyme companies such as Novozymes and DSM have become highly active — through the POET-DSM JV and the Novozymes investment in Beta Renewables, alongside Chemtex and TPG.
READ MORE on POET-DSM here.
READ MORE on Novozymes and Beta Renewables here.
Second, upstream feedstock-oriented companies have become highly active — in areas ranging from municipal solid waste, via Waste Management to traditional feedstocks such as sugarcane, where Bunge has become an active investor in its JV with Solazyme as well as becoming active with other companies such as Cobalt Technologies on the biobutanol front.
READ MORE on the Solazyme-Bunge project here.
The new venture equity
Previously we reported that Warburg Pincus has invested up to $355 million in First Green Partners, a newly formed early-stage venture capital company. First Green will, in turn, invest in early-stage companies that focus on developing methods of converting renewable carbon, such as non-food biomass and carbon dioxide to fuels and chemicals, and applications of clean or green technologies in the conventional energy or industrial process, otherwise known as green-black technologies.
First Green will make initial investments of $500,000 to $10 million in each emerging technology and up to $100 million in a single business as it commercializes.
First Green is led by co-presidents Doug Cameron and Tom Erickson. Cameron was formerly chief science officer at Khosla Ventures, and served as director of the biotechnology group and chief scientist at Cargill. Erickson is a co-founder and general partner of BlueStream Ventures, a venture capital partnership focused on technology companies, and a former research director and technology analyst at Dain Rauscher Wessels, a Minneapolis-based brokerage and investment banking firm.
Cameron commented, “We plan to do 10 early-stage/seed deals over then next 3-5 years. There is a mismatch in the marketplace, between the advanced technologies and innovations related to the carbon value chain that can change the energy landscape, and the lack of capital to help commercialize them.”
READ MORE about First Green here.
The Bottom Line
It’s not your Dad’s financing set-up, in advanced biofuels. New opportunities for scale are inspiring new structures at all stages, from company formation through to commercial-scale.