Bond financing for projects unscathed by credit downgrade

| August 10, 2011

When Standard & Poor’s downgraded the credit rating for the U.S. from AAA to AA, the markets took a significant one-day plunge only to rally the following day after the U.S. Federal Reserve indicated it would keep interest rates near zero until 2013. The news of S&P’s downgrade of U.S. credit, or the resulting market volatility, may have some financial experts inferring a slow economic growth path for the coming years, and everyone from the credit rating agencies to Congress calling for change in the country’s financial approach to debt. But what does the recent financial chaos mean for the biorefining industry? Biorefining Magazine spoke with Mark Riedy, partner for Mintz Levin Cohn Ferris Glovsky and Popeo PC. Levin helped to transform a USDA loan program (9003) that helps biorefining project developers acquire the necessary capital to start and finish and project.

The crux of the changes that Riedy and his team made to help the 9003 program more effective is based in U.S. treasuries, or bonds. Their changes to the 9003 program allow project developers to package their debt in a project’s capital requirements into a series of bonds. The strength of the debt, or the package of bonds housing that debt, according to Reidy and his team, stems from the fact that those bonds are credit-enhanced by a loan-guarantee offered by the U.S. government. We asked Riedy how a downgrade of U.S. credit and the country’s ability to pay back debt might affect a program like the USDA’s 9003 program. “U.S. treasuries represent the most liquid investment around and much of last week’s rally reflects that,” he said. “As long as there are concerns about the global economy, treasuries are likely to remain a safe haven for investors, and I don’t see our (biorefining projects financed via the 9003 program) being severely threatened.”

Riedy and his team, which includes John May, managing director for Stern Brothers, Cindy Thyfault, founder and CEO of Westar Trade Resources and John Kirkwood, partner for Krieg Devault, have already been in talks with investors who are looking to finance renewable energy projects. “We had conversations last week, prior to the downgrade, with investors who were not deterred from their capital-raising efforts or from their investment outlook in guaranteed and unguaranteed bonds.” Riedy added to his comments on the strength his clients still see in the bonds markets that will play such a large role in helping to finance new biorefining projects. “In some ways, the downgrade will highlight the limits of the rating agencies’ reach, there will be some forced selling because of the downgrade, however,” he said, “treasuries still represent the most stable, liquid, fixed income investment—and so I wouldn’t be surprised if the rally continues.”

The future of biorefining projects financed via bond packaging shouldn’t end anytime soon either, as Riedy said, and his team is already looking for alternatives to credit-enhance the bonds without the help of the U.S. government. “We are using major insurance companies’ products to credit enhance project company bonds so that we can move away from U.S. government loan guarantees as the programs are not funded for later rounds or begin to sunset,” he said. “Additionally, we are using loan guarantees from multilateral and bilateral finance institutions to credit enhance project company bonds in international projects for renewable and conventional energy and infrastructure projects worldwide.”