Financing the Commercialization of Biochemicals, Biofuels and - PowerPoint PPT Presentation

Financing the Commercialization of Biochemicals, Biofuels and Bioproducts 4 th Annual Next Generation Bio-Based Chemicals Summit January 28-31, 2013 San Diego, CA John M. May Managing Director Head of the Alternative Energy Finance Group Stern Brothers & Co. St. Louis, MO

INTRODUCTION • Stern Brothers, founded in 1917 and headquartered in St. Louis • Focus on project financing (taxable and tax-exempt) for alternative energy, real estate, higher education and healthcare Locations Atlanta Chicago Cleveland Dallas Denver Detroit Houston Kansas City Los Angeles Reno San Francisco St. Louis (HQ) Seattle Tampa 2

INTRODUCTION • The Alternative Energy Finance Group is Stern’s largest and most robust group • Founded in 2003 • Biofuels, second generation biofuels, biochemicals, waste- to-energy, biomass, landfill gas-to-energy, cogen, CHP, hydro, geothermal • Robust pipeline of debt financings over the next 24 months 3

HISTORY OF BONDS AND RENEWABLES • Tax-exempt bonds were used to finance small waste-to-energy, wood waste and landfill gas to energy projects • Taxable bonds have been used to finance other types of renewable projects such as: biodiesel, biomass and CHP • In 2002, IRS issued PLR recognizing stillage as waste allowing many corn ethanol plants to be financed with tax-exempt bonds • Stern pioneered the use of bonds as an important part of the capital structure for ethanol projects • Developed buy-side acceptance of ethanol projects from mutual funds buying high yield tax-exempt bonds • Bonds can be sole source of debt or a complement to bank debt and offer structural advantages such as longer tenor, lower interest rate and flexible amortization that improve equity returns 4

Typical Project Finance Schematic Equity Investors Project Level Sponsor Debt Providers Equity Investors Project Company (Borrower) Technology Offtake Feedstock EPC Contract O&M Agreement License Agreements Agreements Agreements

BANK VS. BOND MARKET Issue Banks Bonds Large Transactions Syndication Risk Access to incremental pool of investor capital Complex Transactions Prefer “cookie cutter” deals Good for “story” credits Timing Slow (9-12 months) Fast (4-6 months) Cost Expensive Cheaper Technology Risk Less likely to accept Ability to mitigate some technology risk and accept residual Construction Risk Will assume with proper controls (IE) Will assume with “bank like” controls Capitalized Interest None Raised at financial close Drawdowns Timed to construction schedule Disbursed at closing (negative carry in steep curve environment) Tenor Shorter (5-7 years) Longer (15-20 years) Interest Rate Higher, Floating Lower, Fixed Rate Covenants More restrictive Less restrictive Amortization Usually straight line or mortgage style Flexible—can be sculpted to match cash flow & meet ratios Cash Sweeps Customary Not customary Prepayments Customary Make whole provisions (call premium) 6

PROJECTS FUNDED PRE-CREDIT CRUNCH Biofuels Co. of America / Bunge (2006) Capital Structure Dollars $29,600,000 Sources of Funds (In Millions) Biofuels Company of America Biodiesel Manufacturing Facility Taxable Senior Bank Debt $24.6 Senior Secured Credit Facilities Equity/Grants Equity and State Grant 15.4 $15,000,000 39% Debt Illinois Finance Authority 61% Total Funding $40.0 Agribusiness Loan Guarantee Sole Arranger 2006 Deal Overview • 40 million gallon per year ethanol plant; merchant off-take • Stern structured and placed bank debt with Fifth Third Bank • $15 million of senior debt was secured in first-ever State balance sheet guarantee 7

PROJECTS FUNDED PRE-CREDIT CRUNCH GTL Resources LLC / Illinois River Energy (2007) Capital Structure Dollars $30,000,000 Sources of Funds (In Millions) Illinois Finance Authority Debt Taxable Senior Bank Debt $130.0 Subordinate Solid Waste Disposal 77% Facility Revenue Bonds Tax-Exempt Sub Bonds 30.0 Illinois River Energy LLC Ethanol Equity/Grants Project 23% Equity and State Grant 48.0 Series 2007 Total Funding $208.0 Sole Placement Agent Deal Overview • Refinance 50 million gallon per year ethanol plant; merchant off-take • Stern structured and placed largest sub debt tax-exempt bond for US ethanol plant • Bonds were lien and time subordinated; bonds began amortization after bank debt 8

CHANGES TO TRADTIONAL PROJECT FINANCING • Well-known, systematic financial problems have dried up funding from commercial banks • Debt providers want to see the “ Three Pillars of Project Finance ”: Project Financing Feedstock Off-Take EPC 9

RISK PROFILE OF WTE PROJECT Sponsors Management Experienced & financially strong strategic Strong managerial, financial, operational, & investors with demonstrated track record of technical capabilities with demonstrated track investing & operating similar projects. record of implementing similar projects. Ability to provide financial support to Project. Continuity of senior management. Construction Risks Technical Feasibility Fixed price, date certain, turnkey EPC contract with . Reviewed by independent engineer. liquidated damages. Completion guarantee by Sponsors. Technology Risks SOUND Perpetual technology licenses & performance PROJECT warranties. Economic Performance ECONOMICS Generates good debt service coverage under stress scenarios. Operations Risks Stable Project returns, with potential for additional O&M contract with efficiency bonus provisions. upside. Adequate Maintenance Reserve Account. Adequate Debt Service Reserve Account. Offtake Feedstock Supply Long-term quantity offtake agreement. Adequacy of available feedstock. Long-term fixed price offtake agreement (or Long-term quantity supply agreement.. at least a price floor). Long-term fixed price supply agreement (or at Adequate storage & transportation least a price ceiling). infrastructure. Adequate on-site storage. 10

AVERAGE PROJECT RATINGS Source: Fitch Renewable Energy Forum 6/23/11 Note: Includes Public, Private Ratings and Credit Assessments 11

PROJECTS IN NEW ERA OF PROJECT FINANCE Bionol Clearfield LLC (2008) Capital Structure Dollars Sources of Funds $65,000,000 (In Millions) Pennsylvania Economic Senior Tax-Exempt Bonds $65.0 Debt Development Financing Authority 78% Senior Taxable Bank Debt 110.0 Senior Exempt Facilities Revenue Bonds Second Lien Bank Facility 30.0 Equity/Grants Bionol Clearfield LLC Ethanol Project 22% Equity and State Grant 59.0 Series 2008 Total Funding $264.0 Sole Placement Agent Deal Overview • 100 million gallon per year ethanol plant; Five-year off-take with Getty Petroleum • Stern structured and placed largest tax-exempt senior secured bond for US ethanol plant • Bond amortization began after bank debt 12

ADDITIONAL RISKS WTE PROJECTS FACE • Many advanced WTE projects face additional risks that debt providers require to be mitigated to some degree • Technology risk, construction or scale-up risk • There are various credit enhancement mechanisms that can be employed to help mitigate these risks Method Overview Third Party Insurance Insurers with technical expertise and investment grade balance sheets have begun exploring highly tailored technology warranties that may support a bond funded project financing State and Local Government Credit State and local governments have a history of supporting Enhancement alternative energy projects; support ranges from accelerated permitting to “moral obligation” The United States Department of Advanced Biorefinery Loan Guarantee Program, B&I Loan Agriculture Guarantee Program, and the REAP Guarantee Loan Program Export Finance Agency Loan Most OECD member countries have an export finance agency; Guarantees require goods and service to move across borders 13

PROJECTS FUNDED USING CREDIT ENHANCEMENT Myriant Lake Providence Inc. (2012) Capital Structure $25,000,000 Myriant Lake Providence Inc. Revenue Bonds Equity/Grants $15.0 Mil. USDA Guaranteed Bonds 78% Debt $10.0 Mil. Unguaranteed Bonds 22% Series 2012 Sole Placement Agent Deal Overview • 30 million pound per year chemical facility; Off-take agreements for Project’s nameplate capacity • Agreement with suppliers for purchase of 95 Dextrose and grain sorghum grits • USDA B&I loan guarantee to mitigate technology risk; 60% guarantee 14

John M. May Managing Director Head of Alternative Energy Finance Group Stern Brothers & Co. (Office) 314.743.4026 (Cell) 314.583.2130 8000 Maryland Avenue Suite 800 St. Louis, MO 63105 15