When Jonathan Silver, then the executive director of the US Department of Energy’s loan programme office, spoke at Project Finance’s US Power & Renewables Finance Conference in March, he did not have good news for project sponsors. The 1705 authorisation, the source of most of the department’s closed financings, and a product of the Feb­ruary 2009 American Recovery and Reinvestment Act, would not be renewed when it expired on 30 September 2011.

Silver explained just how little funding was left in the 1705 programme, which had proved popular with devel­opers because the US taxpayer was paying the credit subsidy cost, effec­tively a premium for the guarantee, and because it was avail­able to a wide variety of technologies.

Guarantees under the 1703 pro­gramme, which had been on offer since the 2005 Energy Policy Act, were confined to “new or significantly im­proved technologies as compared to commercial technologies” and bor­row­ers had to pay the credit subsidy cost themselves. Four projects, with total debt requirements of over $10 billion, have received conditional com­mitments under the 1703 programme, which has not expired, but none of them have yet closed.

The 1705 authorisation fell victim to the insistence of the then-incoming Republican-led congress on cutting the federal government’s budget. Given the multitude of cuts to US government programmes, it would have been difficult for the office’s staff to take the cuts personally, though the office had from its inception to deal with criticism that it, rather than the market, was engaged in picking winning renewable energy technologies.

Solyndra slings and arrows

But the bankruptcy of Solyndra, a solar module manufacturer and the recipient of the office’s first guarantee, made the office a lightning rod for criticism of the Obama administration. Solyndra was unusual, as a manufacturing, rather than a generation project, and for its cast of venture capitalist shareholders. It was also the subject of a February 2011 restructuring, which has become a focus of the attention of investigations of the office.

In one sense Solyndra was just one of many victims of brutal competition in the solar market sparked by Chinese manufacturers. The other victims include concentrating solar developers, thin-film photovoltaic manufacturers, and even the Chinese manufacturers, which will hope for an easier time from their domestic lenders. But the financing, restructuring and bankruptcy provide more of an insight into the office’s approach to risk transfer than most of the programmes’ clients have been prepared to.

The $535 million loan to Solyndra, which closed in September 2009, was first submitted to the department dur­ing the previous Bush administration, and financed a fabri­ca­tion plant that comprised sub­stantially all of Solyn­dra’s business. Solyndra’s shareholders include Argo­naut Ventures and Mad­rone Partners, which during the Febru­ary 2011 re­structuring contributed an additional $75 million in funding on the condi­tion that this funding enjoy a senior security to the DoE-guaranteed loan from the US Treasury’s Federal Financing Bank.

The security position of the US gov­ernment in infrastructure financings is a sensitive issue. The US Department of Transport insists that debt under its TIFIA programme has a pari passu position in the event of a default, even if it is subordinate in access to cashflows. One reason for the slow pace of devel­opment of the energy programmes was the need to clarify how the department would behave during work-out situations.

Faced with an unpalatable choice between forcing a default at Solyndra, committing more financing itself to a struggling borrower and accepting a subordinate position, the department chose the latter option. But the recoveries from the Solyndra loan are likely to be so low that the decision will allow the department to collect very little on its commitment. Critics of the programme have been quick to exploit the issue of the subordination, in part because several emails from offi­cials at the Energy, Treasury and Justic departments express misgivings about whether it was possible.

Solyndra was able to be the first recipient of a loan guarantee because it was the most ready of the first wave of applicants to enter construction. It was a manufacturing project with an existing customer base, and its ladder-shaped modules offered potential efficiencies over its competitors. But it was heavily exposed to both market and technology risk, unlike most of the later guarantee recipients, which had fixed-price offtake contracts for their output.

Precedents and warnings

There are echoes of the first TIFIA loan to close for a US PPP project, the SR125, or South Bay Expressway. The SR125 was able to close a TIFIA loan quickly because its original developers, Fluor and Parsons Brinckerhoff, had spent so long working on the under­lying contracts for the road. These contracts were, however, unsuit­ed to a PPP, a fact that became apparent even before the road, and its financing, fell victim to poor traffic levels.

Regardless of the resources that the office will devote to its remaining financings it will need to maintain a substantial portfolio management and workout capability. In this respect it will need to follow the example of more established lenders like US Ex-Im, which maintains its own work-outs group. US Ex-Im earned grudging respect for its hard-headedness during the work-outs of late-1990s loans to Asian projects.

The DoE’s loan programme office consciously modeled many of its processes on the example of Ex-Im and Opic, and it must have been galling to hear the president of US Ex-Im, Fred Hochberg, note pointedly that Ex-Im is a “self-sustaining federal agency that receives no net appropriation from the US Congress and charges interest and fees to fund its transactions.”

Ex-Im, founded in 1934, has managed to fend off criticism of its role in providing low-cost financing to large US exporters by having the support of a small number of large corporations ready to mobilise support in congress and a legion of smaller contractors and exporters dotted across the US. The loan programme office, while careful to highlight the jobs that were created thanks to its guarantees, did not have the time to build up a base of political support, and was not specifically dependent on US-made content.

In one notorious incident, a leaked White House memo said that lobbyists for GE, which was among the sponsors of the Caithness Shepherd’s Flat wind project, questioned the utility of the programme and suggested that commercial debt might have been a perfectly acceptable alternative. Other sponsors, perhaps anxious to assure their own investors that they had multiple options, also questioned whether a guaran­tee was worth the time and upfront expense.

FIPP fits in

Some early sceptics, particularly at banks, learned to love the guarantee programmes. The financial institutions partner­ships programme, or FIPP, was a sub-solicitation of the section 1705 programme designed to speed up the process of originating and processing guarantees, by making a commercial lender the applicant, and then having the department guarantee 80% of the debt. This represented the main way, outside advisory work, that banks could get involved in the programme, because the Federal Financing Bank, an arm of the Treasury, has funded conventional loan guarantees.

The high point of FIPP was the $1.4 billion debt financing for the Caithness Shepherd’s Flat wind project in Oregon, which mobilised a combination of bank and bond debt to fund construction of a 845MW GE-supplied wind farm. The financing ironed out many of the issues with stripping out guaranteed and unguaranteed portions of FIPP loans that made secondary sales of FIPP debt possible. It also put forward a viable bank-bond structure for greenfield US renewables deals, with Bank of Tokyo Mitsubishi-UFJ, Citi, RBS and WestLB as arrangers.

But the first loan to close under FIPP was a $98.5 million, 20-year loan from John Hancock for Nevada Geothermal’s 38MW Blue Mountain project. The financing paid down some of a highly-priced interim financing from TCW (now EIG Global Energy Partners), and funded some new drilling at the project site. Given that the 14% interest rate on the TCW debt did not make for a sustainable capital structure, the department was probably right to insist it not be called a refinancing.

The FIPP loan closed in September 2010, two years after the TCW loan closed, but not all of the original loan has been paid down; indeed $70 million of it must remain in place. The new drilling has not allowed the developer to increase the capacity at Blue Mountain, and it is now looking at restructuring the TCW/EIG debt. While the existing resource is declining at a rate of about 2% per year, the FIPP loan is not thought to be under any stress. But if EIG takes a greater equity stake in the project during a restructuring, it will further choke off embattled Nevada Geothermal’s access to cash from the project, which sells baseload power to NV Energy under a 20-year PPA.

The Blue Mountain deal has elements in common with Solyndra, by being fairly well advanced in development at a time when the programme was looking to demonstrate its relevance, and having an existing capital structure that was much more complicated than a typical greenfield project financing. Whether the loan’s seniority to the EIG debt or the circumstances of the FIPP loan’s closing will blunt the impact of any bad news from Nevada Geothermal is question­able, however. Beacon Power, which filed for bankruptcy in the face of the slow deployment of its flywheel power storage technology and some start-up issues with its DoE guaranteed Stephentown project, has given additional ammunition to the programme’s critics.

Private praise

The bad news from the programme has, however, been focused on a small number of listed, or near-listed (Solyndra abandoned an initial public offering several months after its guarantee closed) start-ups. Given their small market capitalisation and need to provide constant updates to investors, they have tended to drown out the news from larger developers, many of them privately held, and utilities.

Most of these developers have maintained a studious silence with respect to the mechanics of how they won their loan guarantees, a posture that can hardly have helped the office make its case. The limited information that has emerg­ed tends to support the view of a department that is prepared to push for sponsors to stand behind their technologies, especially if they want to keep guarantee costs down.

Concentrating solar developer BrightSource filed for a $250 million initial public offering in mid-April, shortly after, along with Google and NRG Energy, it closed a $1.6 billion DoE-guaranteed loan for its 392MW Ivanpah solar tower project. The IPO has yet to close, but the filing high­lighted the cost-overrun support and warranties that BrightSource had to extend to the project, even though it retained only a 14% equity stake at close, and much of its equity contribution was funded through a loan from construction contractor Bechtel.

The remainder of the department’s loans to concentrating solar projects, which make up a substantial part of its portfolio, are likely to have elements of sponsor recourse. Among the repeat users of the programme are NextEra, which owns Florida Power & Light and closed over $2.3 billion in FIPP debt for two projects; Abengoa, a large privately-held European concentrating solar and biofuels specialist, with $2.65 billion in solar debt and a $136 million biofuels loan; and, NRG Energy, with $2.2 billion in debt for its own solar projects, on top of its pro rata share of the Ivanpah financing.

Dwarfing the other deals, if it closes, will be the $8.33 billion 1603 loan guarantee for Southern Company sub­sidi­ary Georgia Power’s Vogtle 3&4 nuclear reactor project, which received a conditional commitment in February 2010, but will not close until the 2,400MW project receives its combined operating licence from the US Nuclear Regulatory Commission. The financing bene­fits from a full cor­porate guarantee from Georgia Power, and the expectation that the utility’s ratepayers would be tapped to support the project in the event of any cost overruns.

In October 2010, Constellation Energy abandoned plans to seek a $7.5 billion guarantee for the Calvert Cliffs 3 nuclear plant that it was developing with EDF, saying that in the absence of a suite of protections along the lines that Southern could provide, it found the credit subsidy cost of the debt to be too high.

The Fukushima incident has in any case dimmed the ardour of US regulators for nuclear power. Cheap shale gas is starting to do the same for any renewable technologies with an appreciable price difference with conventional power. Changes in political sentiment, as much as signs of distress at some borrowers, may have put an end to the loan programme office’s chances of becoming an insitution with the same longevity as US Ex-Im. ■