USDA overhauls its Section 9003 Biorefinery Loan Guarantee Program: What’s in it for you?

by Mark J. Riedy and Ben Snowden, Kilpatrick Townsend 

The USDA has completely overhauled what used to be known as Biorefinery Assistance Program and now is called the Biorefinery, Renewable Chemical, and Biobased Product Manufacturing Assistance Program.

The Program provides loan guarantees of up to $250 million of senior debt for the development, construction, and retrofitting of new and emerging technologies for the development of Advanced Biofuels, Renewable Chemicals, and Biobased Products. The USDA is also soliciting applications for loan guarantees due October 1, 2015 and April 1, 2016  To date, the Program has obligated funds for three (3) loan guarantees and six (6) conditional commitments. According to USDA, these funding obligations will result in approximately 100 MMGY of Advanced Biofuels from approximately $750 million of Program funding.

The complete Kilpatrick Townsend client alert is here. What follows is a Digest excerpt.

The Big Changes

• Adding Renewable Chemicals and Biobased Product Manufacturing, in addition to Advanced Biofuels;

• Removing the requirement that an eligible Biorefinery devote the majority (51 percent or more) of its production to Advanced Biofuels, in favor of a requirement that it produce only some Advanced Biofuels (which do not have to be sold as fuel, can be consumed at the manufacturing facility for other uses and are not restricted by volumes produced);

• Supplementing the Program to include a non-recourse “project finance”-based framework for loan evaluation and collateralization, in addition to the existing recourse “corporate finance”-based framework;

• Consolidating the applicable Business & Industry Loan Guarantee Rules into the new Interim Final Rule;

• Implementing a two-phased application process;

• Overhauling the scoring of applications;

• Changing the 20 percent and 40 percent sponsor cash equity requirements for 80 percent and 90 percent USDA loan guarantee coverage, respectively, to requiring significant sponsor cash equity as determined on a case-by-case basis by USDA. The 20 percent and 40 percent requirements now are that such funding percentages for such 80 percent or 90 percent respective loan guarantee coverage be from non-Federal sources;

• Basing various tests upon “Eligible Project Costs” and not “Total Project Costs,” such as with the calculation of the Guarantee Fee and Annual Renewal Fee;

• Eliminating the previous requirement that differences in the interest rate between the guaranteed and unguaranteed portions of the loan could not exceed 500 basis points;

• Providing 10 additional scoring points to ensure project diversity in the Program’s priority scoring analysis;

• Removing the previous credit rating requirement for applicants requesting loans at or above $125 million and requiring an evaluation and rating of the project’s indebtedness, without considering a government guarantee, from a nationally recognized statistical rating organization (“NRSRO”), as defined by the U.S. Securities & Exchange Commission for all Phase 2 applicants with total Eligible Project Costs at or exceeding $25 million;

• Allowing assets acquired with Federal funds to be included in the total value of collateral;

• Permitting the use of guaranteed loan or bond proceeds to fund a project’s debt service reserve account;

• Prohibiting the sale or assignment of the guaranteed loan to the Borrower, its parent, subsidiary or affiliate, or to officers, directors, stockholders, other owners including members of their immediate families;

• Requiring, as part of the evaluation of technical feasibility, evidence demonstrating 120 days of continuous (meaning generally without unscheduled shutdowns), steady state production from an integrated demonstration unit;

• Allowing the Lender to request a change in the standard for loan origination and servicing from “negligent” to “grossly negligent” on a case-by-case basis;

• Permitting the Lender to reduce its minimum 7.5 percent retention of senior debt on a case-by-case basis with the Secretary of Agriculture’s approval;

• Limiting the period of accrued interest being covered by the Loan Note Guarantee to the Lender to 90 days after the most recent delinquency date reported by the Lender to USDA. Holders of guaranteed loans are subject to limitation of the greater of 90 days after such a delinquency date or 30 days from the date the Lender or Agency sends a Holder an interest termination letter; and

• Permitting the Lender to rely on certain written documentation from qualified third parties (including independent engineers, appraisers, accountants and consultants.

Funds Available under the Program

$130 million of available mandatory funding for FY 2014 ($100 million) and FY 2015 ($30 million). FY 2016 funds could be as high as the additional $20 million from FY 2015 plus the $50 million mandatory 2014 Farm Act funds and any carry over from earlier rounds. Thus, available Program mandatory funds can be as high as $200 million for FY 2014 – FY 2016.

Furthermore, the overall Program subsidy scoring by the Office of Management and Budget (“OMB”) could be from 3-to-1 to 4-to-1 of these amounts based on historical scoring. Additionally, since the USDA has had recent successes in its Program, the subsidy scoring could move to the higher level. Thus, available Program funding could be between $600 million and $800 million in loan guarantee authority.

USDA also requires up to 15% of the mandatory funding of $130 million for FY 2014 and 2015 (when the restriction is effective) (or approximately $19.5 million) to be set aside to provide loan guarantees to promote Biobased Product Manufacturing. With respect to credit subsidy-scored Available Program Funding of $390 million (3 to 1) to $520 million (4 to 1), this 15% funding would be in a rage of $58.5 million to $78 million. This set-aside, however, is not provided expressly for FY 2016 mandatory funds.

Eligibility Criteria for Program Loan Guarantees

• Commercial-Scale Biorefineries using Eligible Technology;

• Biobased Product Manufacturing facilities that use Technologically New Commercial-Scale processing and manufacturing equipment; and

• Facilities that convert Renewable Chemicals and other biobased outputs of Biorefineries into end-user products on a commercial scale.

Borrower Eligibility

• Individuals;

• Public and private entities;

• State and local governments;

• Corporations;

• Indian tribes;

• Farm Cooperatives, and Farm Cooperative Organizations;

• Associations of Agricultural Producers;

• National Laboratories;

• Institutions of Higher Education; and

• Public Power entities.

Lender Eligibility

• A Federal or State chartered bank;

• Bank for Cooperatives;

• Farm Credit Bank, or other Farm Credit System institution with direct lending authority;

• Credit Unions subject to credit examination and supervision by a State agency or the National Credit Union Administration; and

• The National Rural Utilities Cooperative Finance Corporation.

The process

In Phase 1, applicants provide information to determine Lender, Borrower, and project eligibility; preliminary economic and technical feasibility. Phase 2 application materials will be submitted as the project planning and engineering are finalized and must include an environmental report, technical report, financial model, and the Lender’s credit evaluation. Phase 2 materials are required for final approval of loan guarantees by USDA.

Phase 1 Applications and Loan Scoring Criteria

1. A project summary;

2. Application form (Form RD 4279–1);

3. Audited annual financial statements and current statements;

4. Financial model and supporting assumptions;

5. A feasibility study considering the project’s economic, market, technical, and financial feasibility;

6. A business plan including information about the project and the Borrower’s business;

7. Scoring information;

8. Intergovernmental consultation comments in accordance with 2 C.F.R. part 415, subpart C; and

9. The applicant’s DUNS Number.

Phase 1 Scoring Criteria

Phase 1 applications are scored on a point system (on a scale of 125 possible points with a minimum score of 55 points necessary for loan guarantee consideration). Criteria include items such as the following:

• Whether the Borrower has established a market for its products, as determined primarily by the extent and duration of off-take agreements (up to 20 points);

• Whether the area in which the Borrower proposes to place the project has any other similar facilities (up to 5 points);

• Whether the Borrower is proposing to use a feedstock or biobased output of Biorefineries not previously used in the production of Advanced Biofuels or Biobased Products including Renewable Chemicals (up to 10 points);

• Whether the Borrower is proposing to work with producer associations or cooperatives to provide feedstocks (up to 5 points);

• The level of financial participation by the Borrower, including support from non-Federal government sources and private sources (up to 20 points);

• Whether the adoption of the process proposed in the application will have a positive effect on resource conservation, public health, and/or the environment (up to 10 points);

• Whether the technology proposed in the application will not have any economically significant negative impacts on existing manufacturing plants or other facilities that use similar feedstocks or biobased outputs of Biorefineries (up to 5 points);

• The project’s potential to promote rural economic development (up to 20 points);

• The level of local ownership of the proposed facility(ies) (up to 5 points);

• Whether the project can be replicated (up to 10 points); and

• Whether the project uses a particular technology, system, or process that is not currently operating at Commercial Scale as of October 1 (or April 1) of the fiscal year for which the funding is available (5 points).

The USDA also has discretion to award up to 10 points to promote “diversity” among the types of technologies, products, and approaches embodied in the projects for which guarantees are approved.

Phase 2 Criteria

1. Technical assessment/technical report;

2. Environmental assessment;

3. Updates to application materials, as appropriate;

4. Other information requested by the Agency including contacts and agreements;

5. Lender’s analysis, credit evaluation, and supporting materials;

6. Appraisals;

7. Lender’s proposed loan agreement;

8. Estimated timing of loan closing and issuance of the Loan Note Guarantee (pre-construction or post-construction);

9. Credit rating (obtained under the direction of the Agency after loan terms and conditions have been established).

Funding Availability and Requirements

The maximum principal amount of a loan guaranteed for up to 20 years under the Program is $250 million. There is no minimum loan amount. The total amount of Federal participation in a project (including the loan guarantee plus other Federal funding) may not exceed 80 percent of total Eligible Project Costs.

Eligible Project Costs

1. The purchase and installation of equipment;

2. New construction or retrofitting of existing facilities including reasonable contingency reserves, land acquisition, site improvements and development, and associated costs such as surveys, title insurance, title fees, and recording or transfer fees;

3. Permit and license fees and fees and charges for professional services;

4. Working capital;

5. Cost of necessary insurance and bonds;

6. Cost of financing, including capitalized interest;

7. Cash reserve accounts required by the Lender;

8. Engineering costs;

9. Projects expenses such as rail lines, roads and electric power lines; and

10. Any other items subsequently identified by the USDA in a Federal Register notice.

Loan Terms

Loan terms other than interest must be the same for the guaranteed and unguaranteed portions of the loan.

Interest rates on guaranteed loans under the Interim Final Rule are negotiated between the Borrower and Lender, and may be fixed or variable. (7 C.F.R. § 4279.233). Interest rates may not exceed those customarily charged by the Lender for non-guaranteed loans.

Fees

Recipients of loan guarantees must pay guarantee fees of one (1) to three (3) percent, depending on the percentage of the loan guarantee. (7 C.F.R. § 4279.231(a).) Annual renewal fees of one-half (0.5) percent to one (1) percent are also owed, based on a percentage of outstanding principal and the percent of the guarantee. (7 C.F.R. § 4279.231(b).)

Practical Impacts of Interim Final Rule

Deal Flow

Overall, USDA estimates that, based upon full Program funding and the higher percentage Program credit subsidy scoring by the OMB, it could receive approximately 95 applicants for Phase 1 applications. From this applicant pool, it projects approximately 34 such applicants could be invited to submit a Phase 2 application.

About Kilpatrick Townsend

Our firm has broad and extensive experience in every aspect of energy and infrastructure finance. We represent project developers, utilities, lenders, institutions, and investors in the structuring and financing of energy deals. The vast majority of our clients do business in renewable clean tech and conventional energy. Our Energy, Project Finance & Clean Technologies Practice routinely develops and works with creative financing mechanisms to assist our clients achieve optimal results in an ever-more competitive marketplace. Our clients include companies at all stages of development, from large publicly-traded companies developing or investing in multi-billion projects to mature mid-market development companies to young innovative companies raising venture capital and private equity. 

Mark J. Riedy +1 202 508 5823 MRiedy@kilpatricktownsend.com 

Ben Snowden +1 919 420 1719 BSnowden@kilpatricktownsend.com