• Federal Loan Guarantees for Renewable Energy Projects: Strategizing a Sensible Partnership with the Department of Energy
  • October 23, 2009 | Authors: Pamela J. Martinson; Josh Holt
  • Law Firms: Bingham McCutchen LLP - East Palo Alto Office; Bingham McCutchen LLP - Los Angeles Office
  • DOE Introduces New Financial Institution Partnership Program (FIPP) and Issues First Solicitation Under New Program

    On October 7, 2009, the U.S. Department of Energy (“DOE”) announced the creation of the Financial Institution Partnership Program (“FIPP”) and issued a solicitation under the new program announcing the availability of up to $750 million in funding from the American Recovery and Reinvestment Act (the “Recovery Act”) to pay the Credit Subsidy Costs of loan guarantees made for Commercial Technology Renewable Energy Generation Projects. According to DOE, the funding could support as much as $4 to 8 billion in lending to eligible projects. The guarantee percentage will be limited to no more than 80 percent of the maximum aggregate principal and interest during a loan term. Diverging from past programs, applicants for the guarantees are not the borrowers, but rather the financial institutions lending to such projects.

    The FIPP “is intended to expedite the loan guarantee process and expand senior credit capacity for the efficient and prudent financing of eligible projects.” By working closely with the lead lenders, DOE hopes to streamline and accelerate the identification and funding of creditworthy projects. Eligible projects include wind facilities, close-loop biomass facilities, open-loop biomass facilities, geothermal facilities, landfill gas facilities, trash-to-energy facilities, hydropower facilities and solar facilities, among others (but not manufacturing, energy transmission or leading edge biofuel facilities). For at least the first solicitation, the FIPP is aimed at loan guarantees for commercial renewable energy generation projects only, not new or innovative technologies not already in general use.

    Applicants must demonstrate that the proposed loan is structured as a fully private, market-based project or corporate finance loan and will obtain a credit rating of at least ‘BB’ or ‘Ba2,’ independent of a federal guarantee. The first submission due date for applications under the FIPP solicitation is November 23, 2009.

    Federal government partnerships with private sector lenders can create attractive opportunities. Those opportunities are best exploited, however, by lenders with a careful eye toward navigating potential intercreditor issues and managing more rigorous administrative requirements, as discussed below.

    Heightened Diligence Required

    Completion of the loan guarantee application can be streamlined if potentially eligible projects are identified early, and information which will be needed for the guarantee application is gathered and used to prepare an institution’s own credit analysis. DOE requires evidence that a proposed project would receive internal credit approval even if not federally guaranteed; but the guarantee application also covers certain aspects of the project which may not be covered in sufficient detail by every lender’s internal credit report. A lender can avoid delay by addressing in its application: (1) the adequacy, leverage and timing of the proposed sources of funding; (2) the project’s financial viability based on projections for future performance; (3) the technical feasibility based on engineering report, environmental assessments (including NEPA review) and infrastructure requirements; (4) the legal agreements covering the relationships among all project participants; (5) an evaluation of project risks and allocation of risk between parties; (6) financial modeling and stress-testing; (7) the strengths and weaknesses of the project’s sponsors; and (8) the collateral structure and valuations of collateral under default scenarios.

    Unique Intercreditor Issues With DOE Guarantee

    The quid pro quo for the federal guarantee is that DOE is not just a party to the loan documents as a guarantor, but assumes the position of a majority creditor. The guaranteed loan must be secured by substantially all of the project’s assets on a first priority basis, ranking senior in priority of payment to any other project-related debt, which must be subject to subordination agreements. The lead lender will hold the collateral for the benefit of each other lender and DOE. The claims of lenders and DOE will be pari passu and distributions made on a pro rata basis, but any lender’s claim to breakage costs, make-whole amounts, prepayment premiums and other indemnified amounts must be subordinated to the payment of principal and interest. In addition to the $50,000 application fee, the borrower must pay a facility fee of 0.5 percent of the guaranteed portion of the loan, to be fully paid at closing. DOE also charges maintenance fees ranging from $10,000 to $25,000 per year, and requires the borrowers to reimburse it for extraordinary costs (e.g., engineering failure or financial workouts) incurred beyond standard monitoring. DOE’s fees must be treated equally with the fees of the lenders.

    DOE requests the exclusive right to exercise all voting and control rights provided to lenders, including the right to grant amendments and waivers, to accelerate the obligations upon a default, and exercise remedies such as foreclosure. Other lenders’ consent can still be included for changes in interest rates, amortization, maturity, indemnity rights, any changes affecting the senior secured ranking of the loan or priority of payment, and any release of collateral.

    Payment by DOE under the guarantee also has certain limitations. Only a payment default entitles the lender to demand payment from DOE. In the case of other types of defaults, DOE has the discretion to determine that such defaults do not materially impair the rights of the lenders and may deny payment under the guarantee.

    Transferring the Loan may be Restricted

    Exiting the credit facility requires coordination with DOE, because DOE requests certain restrictions on transferability to accommodate its long-term risk exposure. DOE seeks to partner with a lender that will fund a substantial amount of the loan and perform ongoing servicing during the term of the loan, and with other “buy and hold” lenders. Thus, the lenders may not transfer or assign their interests for the first two years after the closing date, but DOE may provide prior consent to transfer interests to another current lender or affiliate.

    Plan for Rigorous Reporting Requirements

    DOE requires that the lead lender submit to monitoring by its Master Servicer, which supervises loan administration and servicing. The Master Servicer looks over the shoulder of the lenders to ensure that credit administration practices comply with standard industry best practice by, for example, tracking payments under the facilities and intervening in payment reconciliation efforts between lenders and borrowers or the lead lender and the other lenders. Furthermore, the Master Servicer protects DOE by ensuring that loans maintain the anticipated level of credit quality, which it monitors by receiving duplicates of all reports and certificates provided by borrowers to lenders under loan agreements.

    In summary, the new DOE loan guarantee program is capable of increasing private sector lending to conventional renewable energy generation projects, but lenders must be aware of the potential intercreditor issues and administrative requirements that accompany these guarantees. The FIPP is the latest plan for funding under the Recovery Act, and will be helpful to those lenders and borrowers able to act quickly to take advantage of its offerings.