2006 was an exciting, but volatile capital raising environment for ethanol companies, and we expect 2007 to be just as exciting—and subject to similar volatility—as longer-term industry fundamentals make themselves apparent to investors. 
 
 In 2006, four ethanol producers completed successful public offerings, raising more than $1.1 billion in equity. The year began with the first-ever initial public offering (IPO) for a pure-play ethanol producer, VeraSun Energy Corp. The VeraSun offering was met with much enthusiasm as oil was trading at approximately $70 per barrel and spot Chicago Board of Trade (CBOT) corn was trading for $2.10 per bushel. The market was also absorbing restrictions on the use of methyl tertiary butyl ether (MTBE) creating an immediate demand spike for ethanol. VeraSun raised $253 million for the company and more than $229 million for selling shareholders in the June offering. 
 
 Aventine Renewable Energy was the second pure-play ethanol producer to come to the public markets just two weeks after VeraSun. The Aventine offering was initially met with the same enthusiasm as the VeraSun transaction, but its share price quickly fell from its offering price of $43 due in part to rapidly changing oil and corn markets, and the release of selling restrictions on 21 million low-basis shares owned by pre-IPO shareholders. 
 
 Overall, the third quarter began with a prolonged decline in the price of both of these stocks as oil prices declined and corn prices increased. 
 
 There was only one completed ethanol public offering and two withdrawn offerings in the third quarter of 2006. The pure-play ethanol producers moved in tandem with the drop in oil prices, and the diversified agribusiness ethanol producers faced the same downward pressure. This created a tough capital markets environment for the two pure-play ethanol producers that attempted to go public in the quarter. Both Global Ethanol and Hawkeye Renewables LLC withdrew their IPOs in the third quarter of 2006 due to market conditions. Global Ethanol had filed to raise more than $350 million on the Australian Stock exchange, and Hawkeye Renewables had filed to raise $325 million on the New York Stock Exchange (NYSE). 
 

 The Andersons Inc. meanwhile raised more than $86 million for the company and $9 million for selling shareholders in a follow-on offering Aug. 22. The Andersons' successful offering signaled the markets' interest in a diversified revenue platform providing disparate revenue sources, which provide either a hedge against increases in corn prices or some benefit from the growth in the ethanol industry overall. Additionally, The Andersons' offering demonstrated investors' focus on the importance of expertise in logistics and transportation. 
 
 U.S. BioEnergy Corp. completed its initial public offering, the only public offering in the fourth quarter of 2006, raising $161 million for the company on Dec. 14. The company successfully priced an up-sized transaction in the midst of industry head winds. At the time of the U.S. BioEnergy offering, oil had fallen by 15 percent from over $70 per barrel to approximately $60 per barrel, and spot CBOT corn had risen more than 60 percent to $3.20 per bushel. The success of the U.S. BioEnergy offering in a challenging market environment demonstrates the ability of strong industry participants to continue to access the equity markets.
 
 More than $1.4 billion of private equity was raised for ethanol and ethanol-related companies in 2006. Thomas H. Lee Partners' leveraged buyout of Hawkeye Holdings Inc. represented the largest single investment. A majority of the rest of the capital was raised to further develop ethanol production companies, such as AS Alliances, Altra Inc., Cilion Inc. and Pacific Ethanol Inc.. The remaining capital raised was invested in research and development companies working to commercialize cellulosic ethanol, such as Mascoma Corp. and Iogen Corp. 
 
 Current Valuation Outlook for Public Ethanol Companies
 In the first quarter of 2007, public market valuations for pure-play ethanol producers continue to be challenging, while the diversified agribusiness ethanol producers have sustained valuations relatively consistent with 2006. The two main valuation metrics currently being used by Wall Street for publicly listed ethanol producers are adjusted enterprise value divided by 2008 estimated earnings before interest, taxes, depreciation and amortization (EBITDA), and adjusted enterprise value divided by 2008 gallons on line. Enterprise value is adjusted in order to provide a view of each of the individual companies on a "fully funded" basis, creating an apples-to-apples comparison for the group. Adjusted enterprise value is calculated by adding the projected debt and subtracting the cash from the current enterprise value that is needed to build the 2008 pipeline. 
 
 Currently, the pure-play ethanol producers trade for approximately 5 to 6 times adjusted enterprise value to 2008 estimated EBITDA and approximately 2.2 to 2.9 times adjusted enterprise value to 2008 gallons on line. The diversified agribusiness companies trade approximately 1 to 2 multiple turns higher than the pure-play ethanol producers. Diversified agribusiness ethanol producers are not typically valued on a multiple of 2008 gallons on line due to their other revenue streams. Interestingly, pure-play ethanol producers are currently trading at very comparable multiples to the general oil refining industry. 
 
 2007 Capital Markets Outlook 
 Entering 2007, two pure-play ethanol companies, Biofuel Energy Corp. and AS Alliances Biofuels, filed to raise $300 million each for their respective companies. It's anticipated that these companies will watch the public markets and evaluate public equity options versus private equity options.
 
 Look for 2007 to initially follow the trends in late 2006 and early 2007. Wall Street has not yet settled on a long-term outlook for the industry. Pure-play ethanol companies should continue to trade in high-correlation with the price of oil and, increasingly, the price of corn. As the year unfolds, Wall Street will begin to develop a thesis on the corn markets and better understand supply/demand dynamics in the context of recent political developments, infrastructure growth and have a clearer picture of funded plants coming on line (a lack of good data on fully-funded plants under construction has created challenges for analysts). Investors will likely favor companies of scale that can demonstrate sophisticated procurement, hedging and marketing strategies, advantaged logistics and transportation, and proven management skills as they finance an industry that the presidential administration would like to see grow by more than five times its current output in the next 10 years.

 
 Merger and acquisition activity will likely increase in 2007, as the replacement cost (on a per gallon basis) may, at times, get close to current public market valuations, and scarcity of good locations and longer construction cycles become more prevalent.
 
 Private and public funding for cellulosic ethanol research will continue and increase, as cellulosic ethanol solutions begin moving from laboratory-based research to the "field trials" stage. Ultimately, to meet President Bush's goals, new feedstocks will need to be accessed and leveraged over a developed ethanol infrastructure.
 
 Debt Capital Markets: 2006 Review
 Throughout the development of the ethanol industry, the majority of ethanol companies building their first plants, and existing companies building new plants or plant expansions, structured the debt component of their financings on a project level as opposed to a company level. The bulk of this project-based debt continues to be placed with a relatively limited range of Farm Credit banks as well as certain commercial banks with a particular biofuels focus. This market was active in 2006 with a high volume of project debt placed during the year. 
 
 In addition, in 2006, some ethanol projects were able to structure and place significant subordinate debt "tranches," or slices, sometimes in the form of tax-exempt bonds, which pushed initial leverage levels beyond those previously seen. The year was also marked by the entrance of new institutional debt capital as some large project debt investors entered the ethanol space on the heels of the passage of the renewable fuels standard as part of the 2005 Energy Bill. 2006 was also notable for the appearance and funding of more new projects with some level of process innovation, including new fractionation and anaerobic digestion technologies.
 
 2007 Outlook
 2006 was easily the most active financing year in the history of the ethanol industry. Recent adverse movements in corn, oil and ethanol prices are, however, promising to make 2007 more challenging for ethanol producers hoping to raise debt capital. In addition, many of the traditional ethanol lenders are at or approaching internal limits on their exposure to the space, creating a situation in which lending capacity may need to be replaced by new entrants. 
 
 In 2007, the ethanol industry will likely be challenged with tapping new sources of debt capital in a more difficult and volatile commodity environment than most of 2006. The result will likely be fewer new projects funded at less attractive pricing and leverage levels. Lenders may become more choosy about projects and look for structural modifications to insulate themselves from commodity risk. 
 

 With that said, the expansion and diversification of the base of ethanol lenders that occurred in 2006 is likely to help ethanol producers in their 2007 capital raising efforts. In addition, political support for the industry remains strong as evidenced by President Bush's call during his 2007 State of the Union address for 35 billion gallons in the next decade. This means that well-positioned ethanol companies, as well as new entrants with compelling business plans are still likely to find a welcome reception in the debt marketplace in 2007.
 
 Thomas Halverson is an investment banker with Piper Jaffray & Co., an international middle market investment bank headquartered in Minneapolis. Reach him at <a href=mailto:"j.t.halverson@pjc.com">j.t.halverson@pjc.com</a> or (612) 303-6371. Christopher Flannery is a public finance banker with Piper Jaffray & Co. Reach him at <a href=mailto:"christopher.j.flannery@pjc.com">christopher.j.flannery@pjc.com</a> or (612) 303-2193. Eric Peterson is co-head of Debt Capital Markets with Piper Jaffray & Co. Reach him at <a href=mailto:"eric.s.peterson@pjc.com">eric.s.peterson@pjc.com</a> or (415) 984-5120.

2006 Review and 2007 Outlook: Equity and Debt Capital Markets Activity

Upcoming Events

2024 International Fuel Ethanol Workshop & Expo

Biodiesel Summit: Sustainable Aviation Fuel & Renewable Diesel

Carbon Capture & Storage Summit

North American SAF Conference & Expo

2025 International Biomass Conference & Expo

2006 Review and 2007 Outlook: Equity and Debt Capital Markets Activity.css-7jxktu{position:absolute;bottom:0px;left:0px;right:0px;height:3px;border-radius:3px;background-color:var(--chakra-colors-brandBlack);}

Upcoming Events

2024 International Fuel Ethanol Workshop & Expo

Biodiesel Summit: Sustainable Aviation Fuel & Renewable Diesel

Carbon Capture & Storage Summit

North American SAF Conference & Expo

2025 International Biomass Conference & Expo

2006 Review and 2007 Outlook: Equity and Debt Capital Markets Activity