USDA proposes reform to loan guarantees for advanced biofuels

By Kris Bevill | February 18, 2011

The USDA recently proposed changes to its loan guarantee program in order to make it more accessible for advanced biofuels projects. The 9003 Biorefinery Assistance Program, authorized in the 2008 Farm Bill, is meant to support the development and construction of commercial-scale biorefineries and retrofit existing facilities using eligible technologies. However, acquiring financing to support the loan guarantees has been nearly impossible through commercial banks. Therefore, the USDA will now allow loan guarantees to apply to the bond market, which has the potential to open up funding for projects that have been otherwise unable to progress.

John May, managing director for St. Louis, Mo.-based Stern Brothers & Co., said the previous structure of the program did not lend itself to funding advanced biofuel projects. The regulations that governed the program dated back to the 1970s and were geared toward commercial banks providing funding for small projects in rural areas, he said. “Of course, with renewable energy, we’ve got a whole new ballgame,” he said. “We’ve got much larger projects, and much more complicated projects. You’ve got technology risk, feedstock risk and offtake risks. What’s become apparent is that the bank market is not as well-equipped as it once was to provide funding to these advanced biofuels projects.”

The bond market is better able and more willing to participate in advanced biofuel project funding, May said. In its proposed rule, the USDA pointed to comments it received stating that the high cost of advanced biofuels projects “quickly outstrips the capabilities of rural and even regional banks.” The bond market is 10 times larger than the commercial debt market and is more able to provide terms that match the project life of advanced biofuels projects, according to comments cited by the USDA in its proposal.

Other proposed changes to the 9003 program include the removal of the definition of “rural,” which will allow projects located in areas with populations greater than 50,000 to qualify for loan guarantees. The USDA also eliminated a requirement for the project to be majority-owned by a U.S. citizen, stating that in the interest of furthering the administration’s goal of increasing advanced biofuels production, foreign-owned advanced biofuel refineries should be eligible for funding.

Comments will be accepted on the proposed changes through April 15. The agency is expected to release a Notice of Fund Availability soon. Potential recipients will be allowed to immediately file applications following the NOFA release. Mark Reidy, a partner with Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC in Washington D.C., cautioned that the funding is expected to have a short turn-around time and potential applicants should prepare to file as soon as possible. “The submission date won’t change, so if you want the loan guarantee, you’ll have to step and do it,” he said.

USDA Rural Development Under Secretary Dallas Tonsager said the agency is “very anxious” to advance the cellulosic ethanol industry and modifications to the 9003 program are designed to make it more accessible to cellulosic ethanol and other advanced biofuels projects. The agency is asserting efforts in all areas of operations to support advanced biofuels projects and plans to continue to do so, he said. “I can’t think of an element of USDA that’s not looking at biofuels projects,” he added.

The proposed rule can be viewed in its entirety here.