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March 2, 2005

The demand for ethanol is expected to continue to grow well beyond existing capacity. Ethanol producers are bringing more capacity online, both in the form of plant expansions and greenfield facilities. If you are building a new facility or looking to expand your current capacity, where will you find the necessary capital to finance your expansion?

Financing the Industry Expansion
The ethanol industry has been historically financed by local agricultural banks. The growth in the industry has begun to outstrip the ability of these local banks to finance new construction. Moreover, ethanol investors have sought to improve upon the relatively low leverage and strict debt service amortization currently required by the bank market. Ethanol investors have recently realized the benefits of financing projects within the high yield and institutional term loan markets (collectively referred to as “debt capital markets”). Aventine Renewable Energy Holdings, Inc., for example, recently tapped the high yield market and Hawkeye Renewables recently tapped the institutional term loan market in two highly successful transactions. The Hawkeye transaction was particularly notable because the bulk of the proceeds were earmarked for new construction.

Recent Ethanol Deals

Advantages of High Yield and Institutional Term Loan Markets vs. Traditional Bank Loan Markets
The high yield and the institutional term loan markets offer significant advantages over traditional bank loan markets including greater leverage and more flexible capital. The term loan market, for example, offers virtually no scheduled principal amortization. This compares favorably with the strict scheduled debt service amortization in the bank market. Additionally, the institutional term loan market offers terms of 7 years plus compared to the standard bank loan market which is between 5 and 7 years.

 
Institutional Term Loan Market
Bank Loan Market
Certainty of Funding
High probability of achieving successful syndication if correctly structured
High probability if underwritten; however banks have great latitude to exercise “flex” in order to ensure syndication. May result in deal at unfavorable terms to borrower
Market Receptivity
Very favorable issuing environment; excess supply of capital has investors searching for opportunities to deploy their money

Investors are receptive to complex structures

Generally conservative; unlikely to significantly underwrite credits below BB

 

Bank industry consolidation leads to reduced appetite for exposure

Syndication
Sold to yield-driven institutional term loan investors
Sold to traditional risk-adverse commercial banks
Covenant Flexibility
Typically more flexible and lenient covenant package, including lower performance thresholds for the allowance of dividends
Typically much more stringent covenant package including a prohibition on dividends if DSCR targets are not met, even for one payment period
Amortization/
Downturn Flexibility
Minimal scheduled amortization per annum. Results in significant financial flexibility during lower margin periods

 

May accommodate a balloon at the end

Strict scheduled annual principal payments; Results in minimal financial flexibility during low margin periods and ease of triggering default. Loan must be fully amortized over the tenor-will not assume refinancing risk

 

Growth of Institutional Investor Market

Institutional investors such as prime rate funds and insurance companies are not regulated in the same manner as banks. As a result, they are able to offer more flexible capital structures and greater leverage, often with comparable pricing. As a result of these competitive advantages, the capital provided by institutional investors has grown significantly at the expense of the bank market as illustrated in the adjacent chart.

Institutional Investors
Major institutional investors include:

  • Prime Rate Funds/Money Mangers
  • Insurance Companies
  • Collateralized Loan Obligation Funds (“CLOs”)
  • Collateralized Bond Obligation Funds (“CBOs”)
  • Bank CLOs
  • High Yield Crossover Investors
  • Hedge Funds
  • Money Mangers
  • Investment Banks/Trading Desks

Attractiveness of this Asset Class

  • Compelling risk/return profile resulting in a large, attractive asset class
  • Broad universe of investors including mutual funds, CLO’s, hedge funds, insurance companies, money managers, etc.
  • Offsets lack of demand from commercial banks
  • “Securitization” of asset class through proliferation of ratings, research and trading support

FocalPoint Partners, LLC is an investment banking firm specializing in M&A and capital raising services. FocalPoint offers its clients access to traditional as well as non-traditional sources of capital including the debt capital markets. We are currently engaged in raising debt financing for two greenfield ethanol projects that we expect to close with extremely attractive rates and structures. Whether you are looking to finance a brand new operation or improve the financing terms of your existing credit facility, give FocalPoint a call and let us show you how you can tap the debt capital markets.

Daniel S. Conway
Managing Director
(818) 728-6047
dconway@focalpointllc.com

Rajesh Sood
Managing Director
(818) 728-6041
rsood@focalpointllc.com