US BioEnergy has closed the largest project financing to date for an ethanol portfolio. The $427 million financing is split between five plants, and includes both operating plants and those under construction. It was also put together by an agricultural lender, and syndicated primarily to agricultural lenders; the very group that the B loan market was meant to have eliminated from the ethanol market.

US BioEnergy is a specialist ethanol producer based in South Dakota. It was founded in 2004, and prides itself as a heartland-based producer, one more in touch with the agricultural ethos of the US Midwest. It completed an initial public offering on New York's NASDAQ, led by UBS Investment Bank, Credit Suisse and Piper Jaffray on 28 December 2006 and raised $161 million. Major shareholders in US BioEnergy include Gordon Ommen, a renewable private equity specialist, Fagen, probably the largest construction contractor for ethanol plants, and CHS, a grain marketer.

It has operated the Woodbury plant, in Lake Odessa, Michigan, with a capacity of 50 million gallons per year of ethanol and 160,000 tonnes of dried distillers grain (DDG) per year, since September 2006. It also completed the 100 million gallons and 320,000 tonnes of DDG per year Albert City plant in Iowa in December, and the 100 million gallons per year Platte Valley plant in Nebraska in November.

It is constructing the Dyersville plant, in Iowa, (to have a capacity of 100 million gallons of ethanol and 320,000 tonnes of DDG per year), the Janesville plant, in Minnesota, and the Hankinson plant, in North Dakota, with the same specifications, and the Ord plant, in Nebraska, with a 50 million gallons of ethanol, 160,000 tonnes of DDG, capacity. And it is a 50% owner of the 100 million gallons per year Grinnell project in Iowa.

This rapid expansion has been achieved against a backdrop of investor nervousness about the direction of the ethanol market. While gasoline prices are high, they are not as high as they were in the middle of 2006, and corn prices have been edging up steadily. The knock-on effects are already apparent. For instance, since US ethanol producers have been buying up domestic corn supplies, US food producers have bought up corn supplies in Mexico, and the price of the Mexican staple, the tortilla, has rocketed.

The lower crush spread, or margin between the price of corn and the price of ethanol (normally a derivative of gasoline) has unnerved the hedge funds that have financed many of the ethanol plants for the last three years. The bank market, which has come round to some ethanol projects in the last 15 months, has become nervous as the spectre of overcapacity looms over the US.

In the circumstances, the resurgence of agricultural banks is unsurprising. High corn prices have been very good for their customers, and agricultural banks are much more comfortable with the vagaries of agricultural prices. Nevertheless, the presence of an agricultural bank on such a large transaction is surprising.

AgStar Financial is a Farm Credit Association, one of the largest in the US, and based in Mankato, Minnesota. The choice of a lender with little presence on the East fits in with US BioEnergy's strategy of growing in size without attracting attention. It is on course to overtake VeraSun as the second largest ethanol producer in the US, behind Archer Daniels Midland.

The use of the agricultural banks also obviates the need for the sponsor to obtain a public rating, an advantage in a market where the ratings agencies have remarked longest and loudest on the risk rising corn prices pose to investors. These lenders have a history with Fagen, for instance, that goes much further back than three years.

The debt from AgStar is not structured as a construction revolving credit, or a holding company financing. Of the $427 million, Hankinson borrows $95.1 million, Janesville $90.3 million, Dyersville $105.1 million, Ord $46.5 million, and Platte Valley $90 million, all under similar terms. Moreover, all have the same contractor, Fagen, which signed a master agreement for design, engineering and construction of dry grind ethanol production facilities in August 2006.

The only exception to the terms of the loans is Platte Valley, which is already operational, and provides some cashflow support to the portfolio. Thus, the loan for Platte Valley is priced at 290bp over Libor, while the other four loans are priced at 315bp until their facilities are complete and they convert into term loans. The borrower also has the option to convert 50% of the term debt into a fixed rate loan, whose interest rate would be fixed at 250bp over the appropriate benchmark at the time of conversion. On the variable rate loan, the pricing changes according to the proportion of equity in the project, and the debt/ebitda ratio. If a project has a 70% equity level, and debt to Ebitda of less than one, the pricing would be 150bp.

In other respects the loans resemble leveraged loans, and include sweeps of excess cash, as well as borrowing base language. The projects benefit from a parental guarantee, although the portfolio makes up the majority of USBE's total capacity, so this would be implicit in any case. Moreover, CHS is providing DDG marketing services to the projects, for which such output is a crucial part of the plants' economics.

The lender syndicate is dominated by agricultural lenders, the more so if regional banks are included. The group consists of AgCounty Farm Credit Services, Badgerland Financial Services, Bank of the West, CoFina Financial, Farm Credit Services of Grand Forks, Farm Credit Services of Mid-America, First National Bank of Omaha, Home Federal Savings Bank and MetLife. After close, AgFirst Farm Credit Bank, 1st Farm Credit Services, PCA/FLCA, and Agribank, FCB will take participations in Agstar's debt. The only obvious outsider is Metropolitan Life, but even it has life insurance interests in the region.

The US BioEnergy financing does not likely offer a viable route for all of the developers looking to take it on in the future. Few could assemble in as fast a space of time the portfolio that USBE has, nor establish such deep relationships with contractors and lenders. If the US ethanol market does not grow as expected, even though it still shows huge long-term potential, the US farming community could still come out smiling.

US BioEnergy Inc
Status: Closed 7 February 2007
Size: $427 million
Location: US Midwest
Description: Financing of 450 million gallons per year ethanol portfolio
Sponsor: US BioEnergy
Lead arranger: AgStar Financial
Sponsor legal counsel: Skadden Arps
Lender legal counsel: Gray, Plant, Mooty, Mooty & Bennett