Overview of the USDA Biorefinery Assistance Loan Guarantee Program
(Section 9003 of the Food, Conservation, and Energy Act of 2008)
Section 9003 of the 2008 Farm Bill established a loan guarantee program within USDA Rural Development for the development and construction of commercial-scale biorefineries and the retrofitting of existing biorefineries to produce advanced biofuels. Proposed rules for the program were issued in April 2010 (the "Proposed Rules") and final rules are expected to be released soon.
While the final rules are pending, the program has been accepting and evaluating applications under a Notice of Funding Availability issued in May 2010 and an Extension of 2009 Funding Availability issued in March 2010. In addition, the first loan guarantee was closed under this program in March 2010, in connection with $80 million of financing for Range Fuels' cellulosic biorefinery project.
Role of Eligible Lenders. The program provides guarantees for loans made by eligible lenders. To be considered an eligible lender under the Proposed Rules, the entity extending the loan would be required to (a) be a regulated or supervised lender (i.e., be subject to credit examination or supervision by a federal or state agency that supervises or regulates credit institutions); (b) satisfy specified minimum capital requirements; and (c) have adequate experience in making, securing, servicing, and collecting loans similar to those offered under the program, as judged by USDA. As is the case in USDA's B&I and REAP loan guarantee programs, the relevant lender would have significant responsibility for developing the loan terms and evaluating the collateral package. In addition, under the Proposed Rules, the original lenders would be required to retain at least 50 percent of the unguaranteed portion throughout the term of the loan.
As described in our accompanying WSGR Alert, the Proposed Rules have several features that limit their appeal to private sector lenders, including the fact that the Proposed Rules seem designed for direct lending rather than bond placements through financial intermediaries. However, the Range Fuels transaction, in which AgSouth Farm Credit and Silicon Valley Bank participated as lenders and for which Morgan Keegan placed a portion of the transaction with bond market participants, provides an example of how more flexibility in the rules could facilitate increased interest in the program. It is hoped that the final rules will allow for improved private sector participation by, among other things, (a) clarifying the possible roles of both lenders and trustees for bondholders; (b) reducing the retention requirements for the unguaranteed portion of the loan; (c) increasing the permissible interest rate spread between guaranteed and unguaranteed portions; and (d) increasing the percentage of loans that can be guaranteed.
Loan Guarantee Amounts. USDA is authorized to guarantee loans of up to $250 million that represent no more than 80 percent of total project costs. There is no minimum loan size. The percentage of the loan that is guaranteed varies depending upon the size of the loan, and, under the Proposed Rules, the maximum guarantee percentage would be:
- 80 percent guarantee of loan amounts up to $80 million;
- 70 percent guarantee of loan amounts greater than $80 million but less than $125 million; and
- 60 percent guarantee of loan amounts from $125 million to $250 million.
The 2008 Farm Bill contemplated that guarantees could be as large as 90 percent of the loan amount, and it is possible that the maximum guarantee percentage could be increased in the final rule.
Eligible Projects. To be eligible, a project must:
- Be located in a rural area (population less than 50,000 and not in an urbanized area; USDA has proposed relaxing this requirement to include areas that are "rural in character");
- Involve a commercial-scale biorefinery for the production of advanced biofuels (i.e., biofuels not derived from corn kernel starch);
- Use a technology that has been demonstrated to have technical and economic potential for commercial application in a biorefinery that produces an advanced biofuel;
- Derive more than 70 percent of revenues from the sale of advanced biofuels (under the Proposed Rule); and
- Have a cash equity injection of not less than 20 percent of the eligible project costs, although the fair market value of equity in real property pledged as collateral for the loan could be substituted to meet the cash equity requirement (under the Proposed Rule).
USDA gives preference to projects involving first-of-a-kind technology deployed at the commercial scale.
Eligible Project Costs. Guaranteed loans may be used for the following project costs:
- Purchase and installation of equipment (new, refurbished, or remanufactured), except agricultural tillage equipment, used equipment, and vehicles
- Construction or retrofitting, except residential
- Permit and license fees
- Professional service fees, except for application preparation
- Feasibility studies
- Business plans
- Working capital
- Land acquisition
- Cost of financing, excluding guarantee and renewal fees
Eligible Borrowers. A wide range of entities are eligible for the loan guarantee, including individuals, corporations, farm cooperatives, agricultural producer associations, rural electric cooperatives, public power entities, institutions of higher learning, national laboratories, Indian tribes, and units of state or local government. Under the Proposed Rules, entities would be required to be at least 51 percent owned by U.S. citizens or permanent U.S. residents (publicly traded U.S. corporations would be presumed to meet this requirement). Comments have also focused on adjusting this requirement.
Effect of Other Federal Funding. The amount of guaranteed loan will be reduced by the amount of other direct federal funding that the eligible borrower receives for the same project. Project financial assistance from state and local governments does not reduce the loan guarantee amount.
Other Key Terms and Conditions. The length of a guaranteed loan may be up to 20 years or 85 percent of the useful life of the project, whichever is shorter. The loan-to-value ratio may not exceed 1.0. The interest rate of the guaranteed loan may be fixed or variable and is negotiated between the lender and the borrower. The guaranteed and unguaranteed portions of the loan may have different interest rates, but, under the Proposed Rules, the blended rate on the entire guaranteed loan may not exceed the rate on the guaranteed portion by more than one (1) percentage point. It is expected that this provision may be adjusted in the final rules.
Interest must be paid at least annually as part of a full amortization schedule. Principal payments may be deferred for up to three years from the date of the Promissory Note and must be paid at least annually thereafter.
Under the Proposed Rules, the entire loan must be secured by the same collateral, and USDA would be granted a first priority lien on all collateral necessary to run the project in the event of the borrower's default. This provision generated significant public comments and may be modified in the final rules.
Lenders are required to pay a guarantee fee of between 1 and 2 percent of the guaranteed loan amount at the time the Loan Note Guarantee is requested and an annual renewal fee of between 0.5 and 1 percent of the unpaid principal balance for as long as the guaranteed loan is outstanding and payable during the construction period. Such fees may be passed on to the borrower.
Application and Approval Process. Requests for the loan guarantees have previously been accepted by USDA only during competitive application rounds lasting two to three months. USDA has proposed two application periods for 2011—the first ending on March 1 and the second ending on June 1. Applications submitted during the first round would also be eligible for consideration during the second round.
An application is submitted to USDA Rural Development by the lender with significant input from the borrowers. Required elements of the application include, among other things:
- A feasibility study of the project;
- A business plan (if not incorporated into the feasibility study);
- Appraisals, accompanied by a copy of a Phase I Environmental Site Assessment (ESA) in accordance with ASTM standards; and
- Credit reports on the borrower and each partner, officer, director, key employee, and shareholder owning a 20 percent or more interest in the borrower, unless the borrower is listed on a major stock exchange. Under USDA's Proposed Rules, loans of $100 million or more would require an independent credit risk analysis from a nationally recognized rating agency.
Once submitted to USDA, an application is evaluated by a panel of reviewers, including Rural Development field staff (for eligibility and financial, technical, and environmental analysis) and U.S. Department of Energy (DOE) staff (for technical merit evaluation). Applications are also subject to NEPA review by USDA staff as a Class II Environmental Assessment (EA), unless the agency deems a different level of environmental review more appropriate for a given project. USDA advises prospective borrowers to contact the agency to determine environmental requirements as soon as practicable after the borrowers decide to pursue any form of financial assistance from the agency.
Fiscal Year 2011 Funding: USDA's 2011 Budget Summary and Annual Performance Plan anticipates that the funding available for this program in the coming year will support over $950 million in loan guarantees. Funding will be made available with the issuance of the program's final rules, which is expected by the end of 2010.