Finding Creativity in Ethanol Project Finance

Ethanol Producer Magazine
July 2008
By Bryan Sims

As consolidation, compressed operating margins and a volatile commodities market continue to persist within a maturing ethanol industry, the traditional financing strategies employed by ethanol plant developers that were effective two to three years ago are rapidly withering.

With the amount of senior debt financing becoming more limited and ethanol developers becoming increasingly hesitant to put forth more equity, the result is a financial hurdle that many plants can’t cross. As a result, more creative finance mechanisms have emerged, one of them being tax-exempt bonds.

Tax-exempt bonds—also known as solid waste bonds—are issued by a municipal, county or state government entity on behalf of developers, whose interest payments aren’t subject to federal income tax. According to John May, managing director of St. Louis-based Stern Brothers & Co., incorporating tax-exempt bonds into ethanol project finance is an effective finance strategy for ethanol developers, depending on the unique circumstances of the project. “The issuance of tax-exempt bonds is an important strategy because the buyers of the bonds, which are typically high-yield mutual funds, are a new source of debt capital and a separate source of debt capital from the banks,” May says. “We think it’s an indispensable part of financing strategy for these ethanol plants in the current market. The ability of commercial banks to continue to provide financing for [greenfield] ethanol plants is limited at this point.”

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