OPPORTUNITIES AND CHALLENGES PRESENTED BY FEEDSTOCK IN
THE FINANCING OF BIOREFINERY, BIOCHEMICAL AND BIOBASED
PRODUCT MANUFACTURING PROJECTS
John Kirkwood
Partner
Krieg DeVault LLP
12800 N. Meridian Street
Suite 300
Carmel, IN 46032
Office) 317.238.6238
(Cell) 317.625.4258
e-mail: [email protected]
Advanced Bioeconomy
Feedstocks Conference
June 9-10, 2015
New Orleans, LA
Thinking Beyond
Traditional Solutions
OPPORTUNITIES AND CHALLENGES PRESENTED BY
FEEDSTOCK IN THE FINANCING OF BIOREFINERY,
BIOCHEMICAL AND BIOBASED PRODUCT
MANUFACTURING PROJECTS
As demand for project finance continues to grow, the tools available to
developers to mitigate traditional project finance risk have also grown.
These tools consist of:
• USDA 9003 Program, renamed by the 2014 Farm Bill as the
“Biorefinery, Renewable Chemical, and Biobased Product
Manufacturing Assistance" Program. 2014 Farm Bill expanded
eligibility for the 9003 Program to include qualified renewable chemical
projects and biobased product manufacturing projects.
• USDA Business & Industry Guaranteed Loan Program which can be
utilized to finance first commercial projects for innovative energy and
renewable chemical projects.
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SECTION 1703 OF TITLE XVII OF THE ENERGY POLICY ACT
OF 2005—EXISTING AND FORTHCOMING SOLICITATIONS.
• DOE solicitation for Advanced Fossil Energy Projects seeks applications for
up to $8 billion in loan guarantees in connection with projects that employ
new or significantly improved fossil energy technology, covering all fossil
fuels, including coal, natural gas, oil, shell gas, oil gas, coal-bed methane,
methane hydrates and others.
• DOE solicitation for Renewable Energy Projects seeks applications for up to
$2.5 billion in loan guarantees for renewable energy projects focused on
advanced grid integration and storage, drop-in biofuels, waste-to-energy and
innovative technology upgrades at existing facilities.
• Tax-Exempt Solid Waste Disposal Facility Bonds.
• New financial products which provide for risk mitigation in technology and
feedstock.
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RATIONALE FOR USING PROJECT FINANCE STRUCTURE:
•
100% equity financed projects
are the exception—not the rule
•
Economically and legally
independent project entity
•
Highly leveraged project entity
with concentrated equity
ownership
•
Allows for project sponsors to
develop outside of their
respective balance sheets
•
No recourse to owners of project
entity; recourse is only to project
assets
The risk profile of a
particular project,
when properly
structured, may allow
for an attractive net
cost of financing
Structure matters
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DRAWBACKS OF USING PROJECT FINANCE STRUCTURE:
•
Takes longer to structure and
execute than equivalent size
corporate balance sheet financing
•
Higher transaction costs due to
creation of an independent entity
and complex contractual structure
•
Non-recourse project debt is
more expensive due to greater
risk and high leverage
•
High leverage and extensive
contracting restricts managerial
flexibility
•
Still, the combination
of organizational,
financial, and
contractual features
may offer an
opportunity to reduce
net cost of financing
and improve
performance
Structure matters
Project finance requires greater
disclosure of proprietary
information to lenders
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PROJECT FINANCE SCHEMATIC
Equity Investors
Project Level Equity
Investors
Sponsor
Debt Providers
Project Company (Borrower)
Feedstock
Agreements
Technology License
Agreements
EPC Contract
O&M Agreement
Offtake Agreements
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STRATEGIES IN READYING RENEWABLE PROJECTS
FOR FINANCING
Sponsors
Management
Experienced & financially strong strategic
investors with demonstrated track record of
investing & operating similar projects.
Ability to provide financial support to Project.
Strong managerial, financial, operational, &
technical capabilities with demonstrated track
record of implementing similar projects.
Continuity of senior management.
Construction Risks
Technology Risks / Feasibility
Fixed price, date certain, turnkey EPC contract with
liquidated damages secured by Letter of Credit.
Payment and Performance Bond.
Perpetual technology licenses & performance
warranties.
Technology reviewed by an independent
engineer.
Technology Performance Insurance.
Economic Performance
Generates good debt service coverage under
stress scenarios.
Stable Project returns, with potential for additional
upside.
Adequate Debt Service 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).
Independent feedstock assessment.
Feedstock Supply Insurance.
SOUND
PROJECT
ECONOMICS
Operations Risks
O&M contract with experienced contractor.
Adequate Working Capitol Reserve Account.
Adequate Maintenance Reserve Account.
Offtake
Long-term quantity offtake agreement.
Long-term fixed price offtake agreement (or
at least a price floor).
Adequate storage & transportation
infrastructure.
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BIOMASS SUPPLY INSURANCE:
A SOLUTION TO MANAGE SUPPLY RISK
Current problem in the industry:
• Long-term supply contracts are rare and are only as good as
the credit quality of the feedstock provider.
• Many small fragmented sources of feedstock supply.
• Investment grade feedstock providers generally charge a
higher price.
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BIOMASS SUPPLY INSURANCE:
A SOLUTION TO MANAGE SUPPLY RISK (CONT’D)
The consequences:
• Long-term perceived risk of feedstock supply is high.
• Difficult to finance new projects.
• Project ratings tend to be low, and capital costs high.
The solution:
• Insurance policy designed for biomass projects.
• Backed by A to AA rated insurance syndicate: investment
grade credit.
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TECHNOLOGY PERFORMANCE INSURANCE:
A SOLUTION TO MANAGE TECHNOLOGY
PERFORMANCE RISKS
Current problem in the industry:
• Large number of new and emerging technologies seeking to
finance first commercial project.
• EPC Contractors unwilling, at any cost, to assume technology
performance risks.
• Institutional Investors either will not accept technology
performance risks or will charge equity-like returns in exchange
for assumption of risks.
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TECHNOLOGY PERFORMANCE INSURANCE:
A SOLUTION TO MANAGE TECHNOLOGY
PERFORMANCE RISKS (Cont’d)
The consquences:
• Without a USDA or DOE Loan Guarantee, if available,
developers have no access to the debt capital markets.
• Perceived risks of performance technology is high.
• Project ratings tend to be low, and capital costs high.
The solution:
• Insurance policy designed for projects having technology
performance risks.
• Backed by A to AA rated insurance syndicate: investment grade
credit.
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SUCCESSFUL FINANCING PROCESS REQUIRES PRAGMATIC
APPROACH ON KEY ISSUES
Ultimate objective of Sponsors is to maximize non-recourse debt while
providing adequate equity to protect project debt investors
•
•
Trade-off between time, cost & optimization of other Sponsor objectives.
Decisions reflected in economic terms of deal (interest rate, term, reserves,
leverage, etc.).
Feedstock Supply
•
•
•
Long-term quantity supply agreement.
Long-term fixed price supply agreement (or at least a price ceiling).
Credit quality (or lack thereof) of feedstock supplier(s).
Offtake
•
•
•
•
Long-term quantity offtake agreement.
Long-term fixed price offtake agreement (or at least a price floor).
Adequate storage & transportation infrastructure.
Credit quality of off-take counter-party.
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SUCCESSFUL FINANCING PROCESS REQUIRES PRAGMATIC
APPROACH ON KEY ISSUES (CONT’D)
Third-Party Reports
•
•
Independent engineering verification of technology / construction.
Feedstock availability / logistics assessment by feedstock consultant.
Technology / Construction Risks
•
•
•
Fixed price, date certain, turnkey EPC contract with liquidated damages.
May require completion guarantee by Sponsors.
Insurance/warranties on parts, availability, & general failure relating to proprietary
technology.
Operations Risks
•
•
Experience / credit quality of O&M contractor.
Adequate Maintenance Reserve Account.
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SUCCESSFUL FINANCING PROCESS REQUIRES PRAGMATIC
APPROACH ON KEY ISSUES (CONT’D)
Debt Structure
•
•
•
Maturity, coupon.
Amortization, waterfall, covenants, cash trap, etc.
Debt Service Reserve Fund.
Economic Performance
•
•
•
Efficient use of cash flows.
Generates good debt service coverage under stress scenarios.
Stable Project returns, with potential upside for equity.
Sponsors / Partners / Management
•
•
•
•
Ability of Sponsors to provide completion guarantees.
Quality of partners (feedstock, EPC, technology, off-take).
Experience and continuity of Senior Management.
Political / Regulatory risks.
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RATING AGENT CRITERIA FOR PROJECT FINANCE
Standard & Poor’s – www.standardandpoors.com
Moodys Investors Service – www.moodys.com
Fitch Ratings – www.fitchratings.com
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