volatility in feedstock prices as corn was going up and down. And you were facing volatility on the offtake side, in terms of people buying your fuel.
X: Sometimes gas is cheaper than the alternatives, right?
JD: Yes. So the merchant era of biofuel project financing no longer really exists, in our opinion. It stopped, because projects have had some issues. There have been some high-profile issues.
X: If that era has passed, what era are we now heading into?
JD: We call it contracted cash flow. That means you have the contractual arrangements around your project financing so you have a higher degree of certainty about your ability to repay debt.
X: For the purchaser of the debt?
JD: Yes, so the lenders have more certainty. Before, when we had volatility on both sides, it was difficult. When the price of corn went up, and the cost of fuel went down, you were sometimes at a point where the margin at your plant wasn’t sufficient to make timely repayments of principal and interest. We are now in an era when lenders are only willing to participate if there is relative certainty about the margin of the project.
X: How do you provide greater certainty that these projects can pay back their debt?
JD: On a project finance basis, in biofuels, it revolves on contracts. It’s about your feedstock costs, feedstock contracts. And contracts with who is buying your fuel. What we’re seeing now is there are a variety of biofuels, and cleantech projects in general like solar and wind, [where] the challenge with new technology is that by definition it’s technology that isn’t investment grade, because no one has built it at scale.
Banks right now do not fund, on a non-recourse basis, large scale project finance.
X: What do you mean by non-recourse?
JD: It means no one has to guarantee it. It’s solely secured by the physical assets, and the contracts.
X: Basically, this is too risky for conventional commercial lending.
JD: Correct.
X: So what are you doing with the USDA, and how does that fit in?
JD: It’s the 9003 biorefinery loan guarantee program. What they have said is the USDA puts up a partial loan guarantee. The debt is partially backed by the full faith and credit of the U.S. government.
X: Partial. How much do they actually put up?
JD: They can guarantee between 60 percent and 90 percent of the debt.
X: So they don’t actually put in capital, they just assure the lenders that if the project goes belly up…
JD: Yes, the lenders will get timely repayment of principal and interest. Or they will get their money back.
X: How has this changed the game?
JD: In 2010, we filed four applications on behalf of four different clients, all of which were granted loan guarantees. And we are moving toward executing the transactions. It’s a process, you file an application, they decide whether they like your project based on objective scoring criteria they have to use, and then you go into a negotiation on the terms, for which the USDA will guarantee X percent of the loan. We are wrapping up negotiations on a couple transactions, and going into actual placing of the debt, execution of the transactions.
X: So you package this thing together, with the USDA sort of underpinning the whole thing? Are you finding a market out there, in terms of investors who want this sort of thing?
JD: Yes.
X: What kind of time horizons are you looking at for re-payment?
JD: 20 years typically.
X: What about the $20 million piece you mentioned that represents equity. Is that coming from venture capitalists?
JD: Yes, it’s from VC firms, private equity firms, strategic investors. There are a variety of people making investments in biofuel companies because they have feedstock. For example, waste haulers are interested.
X: Are you seeing more entrepreneurs coming in and seeking this form of financing?
JD: The USDA program has an annual window. In 2010, we submitted applications and got guarantees. May 10th is the deadline for a new round of funding. We saw a significant increase in the number of people interested in applying.
X: Are they startup companies?
JD: They are startups, and they range from companies that have significant venture capital backing, to some other people with more strategic or corporate investment from a parent.
X: It sounds like there’s a realization that risky technology ideas for biofuels can’t rely on straight-up, traditional venture capital sources.
JD: Yes. And venture capital is very interested in the biofuel space, and very interested in funding companies with interesting technology. What we’ve seen is that these technology companies had the idea to license their technologies, but nobody is willing to buy their technology license until it can be proven that
