Debt Financing

Limited Recourse Debt:  Project Financing 

Limited recourse financing, also known as project financing, is when the payment of the debt is backed only by the project assets and the revenues the project is able to generate.  If the project fails to produce the revenues needed to pay expenses and service the debt, the lender can only pursue the project assets and revenues and not the assets or revenues of the investors.  Because the lender is limited to project assets and revenues to secure repayment of the debt, there is typically an extensive due diligence process by which the lender investigates the project to make sure that it will operate successfully (i.e., pay its bills) even in a worst-case scenario.  Complex securitization agreements and structures must be put in place with the lender to make sure that if the project cannot be operated successfully, the lender has recourse.  Please see “The Law of Biofuels – Financing Your Biofuels Project” written by Edward D. Einowski, Clint M. Hanni, Joe R. Thompson, David L. Benson, and John M. Eustermann for more information on limited recourse debt financing.

Full Recourse Debt:  Balance Sheet Financing 

Full recourse financing, also known as “balance sheet” financing, is when the payment of the debt is backed by the legal obligation of an entity with sufficient financial resources (i.e., its balance sheet) to underwrite the risk that the project will be successful and the debt will be repaid.  Balance sheet financing is generally available only to large entities that have substantial liquid and tangible assets, acceptable levels of debt, and a proven track record of earnings.  In many cases, balance sheet financing is not an option for algae biofuels projects because the projects and the investors do not have the types of balance sheets lenders require.  Even if a project or investor does have the necessary type of balance sheet, full recourse debt still may not be used because the more the balance sheet is used to support project debt, the less it will be available for other corporate purposes.  Please see “The Law of Biofuels – Financing Your Biofuels Project” written by Edward D. Einowski, Clint M. Hanni, Joe R. Thompson, David L. Benson, and John M. Eustermann for more information on full recourse debt financing.

Loan Guarantees 

Both the United States Department of Agriculture (“USDA”) and the Department of Energy (“DOE”) have loan guarantee programs that may be available to an algae biofuels project.  One important difference between a loan guarantee from the USDA and one from the DOE is that the USDA programs generally require a lender to be identified at the time of the application whereas the DOE does not generally have such a requirement.

USDA Loan Guarantees

The USDA provides loan guarantees through a variety of programs, including the Rural Development Energy Program (“REAP”), the Biorefinery Assistance Program, and the Business & Industry (“B&I”) program.  Please see below for more details on REAP and the Biorefinery Assistance Program.  ARRA appropriated $1.7 billion for B&I loan guarantees.  The B&I program is not specific to renewable energy.  However, commercially available energy projects that produce biomass fuel must be located in a rural area and complete two operating cycles at design performance levels to be eligible for B&I loan guarantees.  USDA will guarantee between 60 percent and 90 percent of the loan, depending on the loan size.  The maximum loan amount for a legal entity other than a cooperative is $10 million, although an exception can be made for loans up to $25 million.

DOE Loan Guarantees 

There are two loan guarantee programs being administered by the DOE of interest to algae biofuels projects:  one is under Section 1703 of the Energy Policy Act of 2005 and the other is Section 1705 of the Energy Policy Act of 2005, which was added as part of ARRA.  The Section 1703 program is available only for innovative projects whereas the Section 1705 program is available for commercial renewable energy projects.  There is an open solicitation under the Section 1703 program for innovative technologies for a total of $8.5 billion in funding.  ARRA appropriated up to $500 million to pay for the credit subsidy costs of federal loan guarantees under Section 1705 for up to 80 percent of the costs of leading-edge biofuel projects using technologies that (1) are performing at the pilot or demonstration scale, (2) are determined likely to become commercial technologies, and (3) will produce transportation fuels that substantially reduce lifecycle greenhouse gas emissions compared to other transportation fuels.  Eligible projects must commence construction by September 30, 2011.  There are no current solicitations for algae biofuels projects under Section 1705.  Please see “Show Me the Money – Biofuels Industry” written by Janet Jacobs, Dina Dubson, John Laney, Graham Noyes, David Benson, and the author for more information on this program. 

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