Imperium Renewables has completed a $106 million financing for its Grays Harbor biodiesel project. The project, the largest to date in the US, would immediately turn Imperium from a loss-making start-up into the largest dedicated biodiesel producer in the US. Nevertheless, it also faces the same issues of constrained feedstock supply and growing capacity that has characterised the ethanol industry.

Biodiesel involves the conversion of vegetable oils into a type of diesel that can be blended with petroleum-based diesel and burned in diesel engines. As an organically-derived fuel, it has some environmental benefits and enjoys solid legislative support.

Imperium Renewables was founded in 2004 as Seattle Biodiesel, and developed a small 5 million gallons per year plant in Seattle. The following year this plant went online and Imperium was founded to produce biodiesel on a commercial scale. In May 2006 it announced the Grays Harbor project, the largest to date in the US.

In March 2007, as it put the finishing touches to the financing for Grays Harbor, Imperium filed for an initial public offering of up to $345 million. It has three projects under development, on the East Coast, Hawaii and Argentina.

Biodiesel typically involves combining a chemical compound known as an ester with the fat compound of vegetable oil and ethanol or methanol as a catalyst. Much like ethanol, a producer has to grapple with the prices of several feedstocks as well as the price that the finished product would fetch.

Biodiesel captures the popular imagination in part because it can reuse leftover cooking oil from restaurants. In importance, however, this source pales beside imports of palm oil from Asia. Most commercial-scale facilities, therefore, depend on access to the sea, and the ability to procure supplies from emerging market producers.

Imperium is the second producer of this scale to seek debt financing, following the Carlyle/Riverstone-backed Green Earth project, which in July launched a $91 million B loan financing for an 86 million gallons facility near Houston.

While Imperium mandated SG to approach commodities lenders, and Green Earth mandated Calyon to approach institutional lenders, the deals share some similarities. Of Green Earth's $91 million debt, fully $61 million is in the form of a synthetic letter of credit, with a $10 million term loan and $20 million revolver making up the remainder. It is designed to run on locally-grown soybean oil, but also imported palm oil.

Imperium's financing has a similar breakdown, though term debt makes up a larger proportion. It consists of a $41 million term loan and a $65 million working capital facility. Of the working capital facility, $15 million is a swingline commitment, and $25 million was made available to the borrower before the debt was syndicated.

As the loan was in documentation the construction contractor, JH Kelly, was putting the finishing touches to the plant. The plant, with an equity-funded price tag of $73 million, is now complete, as Imperium broke its self-imposed pre-IPO quiet period to announce. Imperium guarantees the operational performance of the plant, although, since the project is by far its largest asset, the project and sponsor credit can be considered as one.

The seven-year debt is priced at 350bp over Libor precompletion, and 325bp afterwards. This level compares favourably with recent ethanol deals, although it is slightly wider than Abengoa's recent $300 million portfolio deal. Imperium's pricing, however, depends on at least 21% of the plant's capacity being contracted to an investment grade counterparty under a cost-plus formula. It receives a 0.5bp reduction for each additional million gallons of capacity it contracts.

The project has provided assurances to local government that in return for incentives it will try to maximise the use of locally-grown feedstock. US producers at present cannot hope to compete on price with the vast plantations of Malaysia and Indonesia, and do not enjoy the tariff advantage that US corn-growers do. But prices of palm oil feedstock have increased substantially in recent months, and have the potential to eat substantially into Imperium's margins.

Among the plant's suppliers are Bunge Canada, American Commodities Brokerage Co, ADM, Natural Selection Farms and Cargill. The main offtaker, and reportedly a 7% owner of the Grays Harbor project, is the cruise line, Royal Caribbean. The project also buys methanol from Canadian producer Methanex. Methanol producers have suffered as ethanol took over from methanol derivative MTBE as a fuel additive, but are set to benefit from methanol's use as a catalyst in biodiesel production.

The most important structural benefit for the lenders, however, is a cash sweep during the early life of the debt of 50%, and a 100% sweep as maturity approaches. The financing also includes a borrowing base feature, where draws are conditional on the value of receivables and inventory held at the producer. The cashflow waterfall puts the payment of accrued interest ahead of the payment of costs, expenses, taxes and fees, with principal repayment following after that.

The outlook for biodiesel is generally strong, however, especially if the blending credit for biodiesel remains in place. This provides some support for the price of biodiesel, much as its equivalent for ethanol does. According to Scott Hughes, the director of government affairs at the National Biodiesel Board, the industry is looking for an extension of a bioenergy programme run by the Department of Agriculture, which would help feedstock prices, and a mandatory biodiesel blending requirment, which would offer producers further price support.

Imperium Renewables is a start up, its 48% owner a former pilot, and its senior management have backgrounds in the IT and beverage industries. The IPO, though, has signed up underwriters Morgan Stanley, Lehman Brothers, UBS, Jefferies, Piper Jaffray and Calyon (SG is conspicuously absent). The plant now accounts for 11.5% of US production capacity, and while barriers to entry are about the same as ethanol, the biodiesel market suffers from fewer distortions.

Imperium Grays Harbor
Status: Closed 27 July 2007
Size: $73 million (construction cost)
Location: Washington State
Description: 100 million gallons per day biodiesel project
Sponsor: Imperium Renewables
Lead arrangers: SG (collateral agent) Banco Santander (syndication agent), Nord/LB (documentation agent)
Borrower legal counsel: Gibson, Dunn & Crutcher; Wilson Sonsini Goodrich & Rosati
Lender legal counsel: Baker & McKenzie
Independent engineer: RW Beck
Insurance adviser: Moore-McNeil
Market consultant: Muse Stancil
Plant engineer: Parker, Messana