Credit wraps could de-risk biomass feedstock supply

By Anna Austin | January 26, 2011

Some biomass projects are not investment-grade quality in today’s finance market for a few reasons, the main one being the lack of long-term feedstock supply contracts.

A new financial instrument being offered by feedstock supply specialist Ecostrat could change that, according to CEO Jordan Solomon. During a biomass finance webinar on Jan. 26 held by ACORE and the Biomass Coordinating Council, Solomon discussed the biomass supply credit wrap system and how it could change the way lenders look at feedstock supply risks.

“The reason feedstock supply is so risky is that it’s exactly that, and typically there are many different suppliers of biomass in a wood shed,” Soloman said. It’s also typical for most suppliers not to have balance sheets behind them, and most won’t agree to long-term fuel supply agreements in hopes of getting a better price for the material in a few years. “So the question is, can we de-risk that biomass supply, and if so, how?” he said.

Explaining the credit wrap, Solomon said it is a bankable guarantee for biomass supply that functions like a performance bond and is backed by investment-grade credit.  “A single, creditworthy entity stands between the biomass project and the supplier, so instead of a project contracting with 30, 40 or 50 suppliers, it contracts with one entity, which is Ecostrat.”

And, instead of the project taking the risk of suppliers becoming insolvent, all those risks over the term of the contract are downloaded and worn by the intermediary backing the credit wrap. The project itself becomes de-risked, Solomon said.

These credit wraps would have liability caps, which would be dependent on a number of different factors, according to Soloman. A typical liability cap would be $15 million, but could decline, remain stable, or increase over the term of the project depending on its risk profile. A typical term of the credit wrap would be 10 to 15 years.

“The way the formula works is that the biomass price is fixed,” Solomon said. “In terms of the contract, the base price is subject to certain escalators. There can be up to four escalators—fiber cost inflation, diesel fuel prices, distance and stumpage (the cost paid to the landowner for harvesting tress on their land). “What’s important to note is that they are all capped.”

[Credit wraps] give long-term supply guarantees for the cost, quantity and quality of the fiber, Soloman said. “You continue to use many existing local suppliers, but the feedstock risk is downloaded to one, which eliminates price increases due to speculation. It smoothes out all the bumps, creating bankable guarantees with long-term fuel costs, and it’s very beneficial.”

Other speakers who participated in the webinar were John May, managing director of the Alternative Energy Finance Group at Stern Brothers & Co., who discussed bond financing for renewables, and USDA Rural Development-Business and Cooperative Programs Administrator Judith Canales, who talked about the successes and upcoming changes in the Biorefinery Assistance Program, Repowering Assistance Program and Rural Energy for America Program.