Here at Mintz Levin we have been highly successful, along with Stern Brothers/Krieg DeVault/Westar Trade, in assisting in the preparation and receipt of 3 out of 3 client awards of conditional loan guarantee awards (with a 4th to be issued shortly) from the USDA under its Section 9003 loan guarantee program (which we successfully re-wrote working very closely with USDA to make it a workable program and recently have reached the first project closing thereto) in the FY 2010 round under our credit-enhanced bond finance mechanism.
Further, we recently filed more than 50% of the applicants applications in the current FY2011 Section 9003 round. Each round of these applications represents between $1.5 million- $2 billion in total project costs.
We assisted in obtaining the first FY2010 financial closing under this new financing mechanism three weeks back, and we are moving quickly to the finish line with the USDA on several other closings. We also have developed a way to credit enhance these project bonds with various insurance products from A-rated major insurance companies, in lieu of the use of US government loan guarantees.
These products also “wrap” the new technology (as does the USDA loan guarantee) for the technology’s first commercial operation so that performance bonds or technology wraps are unnecessary for the first commercial application of the new and unique technologies. Additionally, we also are using abundant loan guarantees from multilateral and bilateral finance agencies to credit enhance such project company bonds in commercial international projects. These credit enhanced bonds work on all types of renewable and conventional energy and infrastructure projects worldwide.
Also, we have been working for several months with the DOD, DOE and USDA, along with the Air Transport Association (ATA) and Clean Alternative Aviation Fuels Initiative (CAAFI), for the creation of the first-ever US public-private partnership, where the DOD would direct the investment of up to $100 million per project in government equity for the development and production of advanced bio-jet fuels (JP-5 for the Navy and JP-8 for the Air Force and Army Air Corp) and advanced biofuels (F-76 for tanks and other armored vehicles for the Army and fleets of vehicles for the collective armed forces). The RFI was issued on August 29, 2010 for the initial 3-year program which will invest up to $510 million in these advanced military biofuels. The RFP will be issued later this Fall 2011 for this competitive process.
The intent is to convert the entire slate of military fuels to domestically-produced biofuels as soon as possible due to the increasing uncertainties of Middle East stability and resulting increasing fuel prices from imported oil and refined products. The DOD-DOE-USDA program expects to fund up to 4-5 such projects annually to completely remove the reliance on imported fuels and result in the use of only US manufactured biofuels for what the military will call the “US green fleet”.
With respect to the credit-enhanced bonds, we developed this first-of-a-kind financing mechanism with Stern Brothers (a US bond placement company) and its counsel, Krieg DeVault, and have presented it at several renewable energy finance conferences with much interest from the respective audiences.
Our revolutionary credit enhanced bond finance mechanism also will work worldwide for project financings at low costs and long tenors, so long as one can secure a loan guarantee and/or insurance products to credit enhance the bonds, a buyer for the bonds and that the developer is locating its project in a country with a bond market.
With respect to the US and international projects, and the various DOE, USDA and other loan guarantee programs, our new and unique bond financing proposal, accepted by the government with great praise, replaces hard-to-find and expensive/short term commercial debt for renewable energy projects.
We met with DOE in 4th quarter 2010 on our unique/yet unused renewable energy bond finance structure proposal for use in its various loan guarantee (“LG”) programs. The senior DOE LG officials signed off on its use before we left the meeting. They view our credit-enhanced bond proposal as an acceptable commercial financing mechanism for the DOE LG 1703 and 1705 programs and a clear fit within the definition of “Lender” for each of these programs. Under the Section 1703 program, we could use it either in lieu of the Federal Finance Bank (“FFB”)(which might be a consideration in certain circumstances despite the great rates/tenures of the FFB) or where the DOE uses the FFB but covers 100% of less than 80% of the total project costs (which is what the agency regularly has been doing where it consents to 100% LG coverage).
Under the DOE Section 1705 program, our bond finance mechanism is fully available within the definition of “Lender”, as the FFB cannot be used. As the DOE recently has created 2 lists of the remaining LG applicants under consideration–a “Go List” of approximately 19 applicants and a “Hold List” of approximately 35-60 applicants, the DOE may be willing to resort to our bond financing mechanism for applicants on the “Hold List”. The DOE otherwise is having little to no luck in attracting any commercial lenders into the LG programs.
The USDA in Summer 2010 signed off agency-wide on our bond finance mechanism that we formally presented to them in late March 2010 for the Section 9003 (Integrated Biorefinery Program), Section 9007 (Renewable Energy Assistance Program-REAP), Business & Industry (B&I) program and various/several electricity LG programs. We had filed formal written comments regarding USDA’s full set of loan guarantee programs with respect to full adoption of our bond finance mechanism program-by-program.
In August 2010, we received the first clear signal on USDA’s position with respect to our bond finance mechanism, when the USDA B&I program formally adopted it. The other USDA loan guarantee programs then followed suit in adopting our bond finance mechanism in the new interim final rules for the larger Section 9003 Intergrated Biorefinery loan guarantee program, published on February 14, 2011, and smaller 9007 loan guarantee program–REAP, published on April 14, 2011, in the Federal Register.
In early January, 2011 and ahead of the publication of the new rules, USDA adopted our 100% bond finance mechanism in lieu of commercial loans in its Section 9003 Program as the full project debt and issued the only loan guarantees ever issued in US project finance history under for all of our client applicants–the only ones approved–in the total project amount of nearly $1.5 billion. USDA now fully has adopted our program in each of its B&I, Section 9003 and Section 9007 loan guarantee programs.
Briefly, the financing works as follows:
The lender steps outside of its traditional role of lending its funds to an eligible borrower. Instead, the lender (we expect to use a commercial/investment bank and have a top 5 major commercial bank working with us) acts as a trustee.
In this role, the project company issues taxable corporate bonds (placed by Stern Brothers) to accredited investors (but $1 million net worth investors–under SEC rules– would represent the floor, while generally the bonds will be placed/sold to institutional investors) who place the purchase/sales proceeds into an account with the trustee bank. The trustee bank then on-lends the bond proceeds into the project. The USDA and/or DOE, as part of the financing, places the loan guarantee(s) over the bonds. Thus, the generally low-rated bonds essentially would become AAA-rated under the full faith and credit of the US government.
The trustee bank would hold legal title to each of the bonds, mortgages and other required project security during the entire term of the bonds and loan guarantee(s). The bond holders similarly would hold beneficial title to the bonds during the same periods.
The bonds approximately would have up to a 2% lower interest rate than the 7% plus currently available as commercial lending rates. They would have maturities of 15-25 years, instead of the 1-7 year tenures which banks currently are forcing renewable energy projects generally to accept (and which shorter tenures will not permit the proper amortization of such projects). Only the Treasury’s Federal Finance Bank, at interest rates of 22-75 basis points over Treasuries (or approximately 3-3.5%) and tenures of 20-30 years, available solely for the DOE Section 1703 Loan Guarantee Program (for certain new and unique technologies) and only when DOE agrees to 100% coverage of up to 80% of total project costs, offers better terms. Notwithstanding, if the DOE does not permit 100% loan guarantee coverage in that Section 1703 program, or permits 100% coverage but at less than 80% of total project costs, then our bond proposal also would work in that program.
Bond financing is also much more flexible than commercial debt. It does not run into many of the problems/regulatory restrictions facing lenders who will agree to look at and participate in these loan guarantee programs at the USDA and the DOE. It also permits the trustee bank to participate with very little risk. Further, if additional costs or CAPEX-bearing applications/equipment/build-out must be considered in the project, the project company would not need to increase an existing loan or locate an additional loan, rather it merely must place additional bonds to secure additional proceeds.
This bond finance proposal may work as part of financing a project in countries like India with a maturing bond market, so long as a loan guarantee could be used over the bonds. Such loan guarantees might be available through bilateral finance institutions, like the US Overseas Private Investment Corporation, or multilateral finance institutions, like the International Finance Corporation and Asian Development Bank.
Mark J. Riedy is a partner at the Mintz Levin Cohn Ferris Glovsky and Popeo law practice and has represented renewable and conventional energy and infrastructure companies for more than 35 years in the US and throughout nearly 50 countries worldwide as a project finance, private placement and government funding attorney. He was one of the 5 founders and serves as General Counsel of the 800-member plus American Council On Renewable Energy (ACORE). He was the original General Counsel of the Renewable Fuels Association in 1979 and am currently serves as General Counsel of the Clean Fuels Development Coalition (1985) and ACORE (2001).
Mintz Levin has one of the largest Cleantech and Renewable Energy Project Finance Practices in the US representing clients domestically and internationally with more than 40 dedicated attorneys. Mintz’s Cleantech and Renewable Energy Practice has closed 40 transactions in 2009, completing over half a billion dollars in energy and clean tech deals. Since 2006, the practice group has completed more than 170 transactions, and since 2007, it has closed more than $3.15 billion in deals.
