Financing biomass the question? Bonds the answer.

“In light of the current economy, a number of traditional lenders for energy and infrastructure have fallen by the wayside.,” says Mark Riedy of Mintz, Levin, in an article published in the San Diego Business Journal.

“Among those remaining, some of them aren’t willing to take the risks associated with renewable energy projects,” he adds. “Others don’t want to loan to renewable energy projects because it’s not their typical portfolio. Instead of reaching into their pockets and making a direct loan of their money, they’re standing in a position of being a trustee in the bonds. The project company will issue its corporate bonds to an accredited investor, somebody with at least $1 million net worth. The bonds themselves, but for the loan guarantee, would likely be not investment grade. With the loan guarantee on top of them, they become triple A.”

Reidy, along with colleagues at Stern Brothers, Mintz Levin, and Kreig DeVault, developed the following solution.

1. The lender steps outside of its traditional role of lending its funds to an eligible borrower.

2. Instead, the lender (the team confirmed that it expects to use a commercial/investment bank and have “a top 5 major commercial bank working with us”) acts as a trustee.

3. 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).

4. The investors place the purchase/sales proceeds into an account with the trustee bank. The trustee bank then on-lends the bond proceeds into the project.

5. The USDA and/or DOE, as part of the financing, places the loan guarantee(s) over the bonds.

6. Thus, the generally low-rated bonds essentially would become AAA-rated under the full faith and credit of the US government.

7. 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).

8. The bond holders similarly would hold beneficial title to the bonds during the same periods.

9. The bonds approximately would have up to a 2% lower interest rate than the 7% plus currently available as commercial lending rates.

10. 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).

11. Only the Treasury’s Federal Finance Bank offers better terms, at interest rates of 22-75 basis points over Treasuries (or approximately 4%) 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.

12. The program is designed to work under the USDA’s section 9003 program, or the DOE’s 1703 program under many circumstances, the DOE’s 1705 program, or the USDA’s B&I or REAP programs. A good comparative for all these programs is this comprehensive presentation from Mark Riedy of Mintz Levin.

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