Project Financing: the Insured Way

Insurance packages could be the next tool to mitigate technology risk
| October 24, 2011

If you’re worried about technology risk ruining a project’s ability to receive financing, don’t be—just get insured. That is what Mark Reidy, partner at Mintz Levin, and John May, managing director for Stern Brothers, would suggest anyway. The pair is working to develop an insurance package for advanced biofuels technologies that would help to mitigate the risk associated with novel technology. “The general idea is that you pay a premium of something like 5 to 10 percent of the Capex (capital expense) costs associated with the technology alone, and then,” May explains, “in return, you get a performance warranty that would last from project finance close through 5 years.” This would act in place of a technology wrap often given by an EPC contractor.

The idea, to mitigate risk stemming from technology that’s never been utilized at a commercial scale, is actually nothing new. “There are insurance companies out there that have already issued policy guaranteeing performance on technology for wind and solar,” May says. “The question is, can we push it to get technology risk insurance for advanced renewables?”

That shouldn’t be a problem because Reidy says the project finance super team has already pulled out roughly 50 of the most promising bioenergy-based companies that had applied to various U.S. DOE loan guarantee programs and were still on the waitlist, all to help them seek out insurance packages from companies like AIG and others. Why? Because some believe the loan guarantee and government-backed finance programs that have helped previous advanced bioenergy projects receive the necessary funding are coming to an end, mainly because the congressional super committee with plans to make huge deficit cuts doesn’t bode well for government-based project finance renewal.

May’s work with first-generation biofuels plants, and his innovative financing approach based on bond-financing led the team to seek out new insurance packages. “Our focus is on project finance debt and on the indisputable truth that whoever the player is at the early stage,” he says, whether it is a VC or a strategic investor, “they are not going to do all equity forever. Project finance debt is an inevitable thing that has to be accomplished.”

Given that truth, as May explains it, combined with what May learned from first-generation biofuels plants—that no project was high on the credit-quality scale—he and Reidy (and others on their team) set out to form the bond financing mechanism that was credit-enhanced by government loan guarantees. With the loss of those loan guarantees that essentially acted as credit enhancers to projects, May and crew needed to find an alternative to serve as a credit enhancer in the event that scheduled government dollars allocated to successful biorefining loan guarantee projects were nixed. “The more tools we have in our toolbox to mitigate risk,” May says, “the better likelihood of actually getting a project financing done.” And Mays has the proof to back up his stance on mitigating risk. “The reality is there is hope,” he says, because his team will be closing on an advanced biofuels project this year “that is going to be done in a replicable fashion.” 

—Luke Geiver