A new farm bill enacted in February expands an existing federal loan guarantee program, called the Biorefinery Assistance Program, that was originally designed to incentivize development of second generation advanced biofuel projects, by providing new mandatory funding levels for the program and by extending eligibility for loan guarantees to producers of renewable chemicals and manufacturers of biobased products.

The bill allocates $881 million in mandatory funding to renewable energy and biofuel initiatives.

It broadens the scope of the existing section 9003 Biorefinery Assistance Program, called BAP for short. The program is run through the US Department of Agriculture.

The expansion is a potential boost for the renewable chemicals industry in the United States. Renewable chemicals are chemicals that can be produced from renewable feedstocks such as butadiene, levoglucosan, and tetrahydrofuran. According to USDA estimates, more than 3,000 companies in the United States manufacture or distribute biobased products. The most visible biobased product is soft drink bottles made from bioplastics. Major bottling companies, such as PepsiCo and Coca-Cola, have invested heavily in finding a way to produce polyethylene terephthalate (PET) plastic, a traditionally petroleum-based plastic, with entirely biobased inputs. Other large manufacturers and distributors of packaging, cosmetics, and cleaning products have also invested in the use of biobased inputs in their products. However, to date most have found that the initial costs of commercial production are too high to be passed along to consumers. Federal loan guarantees have the potential to lower the capital costs of the first few facilities and help the industry drive more quickly to economies of scale.

BAP

Loan guarantees are available under BAP for both development of commercial-scale biorefinery projects and retrofitting existing commercial facilities. The program was originally funded under the 2008 farm bill. Before this year, the program only provided loan guarantees to biorefineries producing advanced biofuels, defined as “fuel derived from renewable biomass other than corn kernel starch.” The regulations required that at least a majority of the production of the biorefineries be advanced biofuels, measured in Btu content, or volume if no established Btu values exist.The program requires the lender, rather than the borrower, to apply for the loan guarantee from the USDA. As such, it is essential for a potential producer seeking to benefit from the program to identify a lender up front.The program provides loan guarantees on a percentage basis, with the maximum percentage allowable determined by the size of the loan. Chart 1 identifies the maximum percentage guarantees available:

Chart 1

Loan Amount             Maximum Percentage Guarantee

0 - $125 million          90%

$125 - $150 million    80%

$150 - $200 million    70%

$200 - 250 million      60%

 

The maximum loan amount under the program is $250 million, and there is no minimum amount. However, loans are not allowed to exceed 80% of the total eligible project costs. Eligible project costs include the costs to purchase most of the equipment, construct or retrofit the project, pay permit and license fees, acquire land and, cover financing charges, excluding guarantee and renewal fees, and set aside an amount for working capital. A guarantee fee must be paid to USDA when applying for the guarantee; the fee is calculated as a percentage of the guarantee. Chart 2 shows the percentage fee for each level of guarantee:

Chart 2

Guaranteed Percentage of Loan     Guarantee Fee Percentage

90 % guarantee                                3%

90% - 75% guarantee                       2%

75% - 65% guarantee                       1.5%

65% or less guarantee                      1%

 

The USDA regulations allow for loan terms for the shorter of 20 years or the entire useful life of the project. The regulations require that the guaranteed and unguaranteed portions of the loan must be secured by a first lien; however, the USDA has considered subordinate positions on inventory and accounts payable under certain circumstances.

Expansion

Eligibility under the program is being extended for the first time to producers of renewable chemicals and manufacturers of biobased products. The expansion means potentially more competition for scarce dollars under the program.

The 2014 farm bill marks the first time that Congress has recognized and defined “renewable chemicals.”

A renewable chemical is “a monomer, polymer, plastic, formulated product, or chemical substance produced from renewable biomass.” Renewable biomass differs from other biomass in that it is organic material that Congress has decided is available on a regular and recurring basis. Renewable biomass under the farm bill includes renewable plant material, plant waste material and animal waste byproducts.

Biobased product manufacturing is defined in the bill as the “development, construction, and retrofitting of technologically new commercial-scale processing and manufacturing equipment and required facilities that will be used to convert renewable chemicals and other biobased outputs of biorefineries into end-user products on a commercial scale.”

The BAP program has been used to date mainly to help producers of advanced biofuels.

In addition to expanding eligibility, the farm bill authorizes $100 million in mandatory funding for BAP in fiscal year 2014 and $50 million in mandatory funding for each of fiscal years 2015 and 2016. The bill also authorizes discretionary funding of $75 million for each fiscal year from 2014 through 2018. In the statute, the only limitation on the funding is that the Department of Agriculture is only authorized to allocate up to 15% of the mandatory funding to biobased product manufacturing for fiscal years 2014 and 2015.

Record To Date

The BAP program has had mixed results to date.

Since the program was first funded in 2008, four projects have achieved financial close as a result of the program, while 12 conditional commitments have been issued. Two of the conditional commitments have since been withdrawn.

The loan guarantees reduce the cost of debt by allowing borrowers to raise money on the guaranteed portion of their loans at close to the cost of similarly-maturing US government obligations, such as US Treasury bonds, rather than borrowing based on the underlying creditworthiness of the borrower. A typical borrower could easily benefit from a 4% to 5% reduction in the overall interest rate on its debt.

The program requires that the lender of record, not the borrower, submit an application for a loan guarantee. Thus, an initial step for any borrower attempting to take advantage of the program is to find a lender of record willing to go through the application process.

The USDA opens the applications window with a “notice of funding availability.” The most recent NOFA occurred in October 2013, and the window was open through January 31, 2014. The October 2013 NOFA was for a total of $180 million, including mandatory funding and uncommitted amounts from previous fiscal years.

Once the NOFA is issued, the applications window is opened. While the application must be submitted by the lender of record, the lender and the borrower must work together to prepare the application for submission. An application under the USDA guidelines must address the following areas: feasibility studies, technical assessments, economic analysis, business plan, environmental information, a lender’s analysis and financing information.

The application can be time consuming to prepare for more complex projects. Companies hoping to avail themselves of the program should begin discussions with potential lenders of record and begin preparing the necessary information before the next NOFA is issued so that the application can be submitted within the given time frame of the NOFA.

The USDA is likely to issue a new NOFA in the coming months in line with the mandatory funding amounts provided under the bill. This means that there may soon be opportunities for renewable chemicals producers and manufacturers of equipment for making biobased products to take advantage of federal loan guarantees.