Grainnet

by Myke Feinman, BioFuels Journal Editor

Myth: With cash corn prices hovering near $3.60 a bushel and the price of ethanol down to $1.70 a gallon, financial institutions are shying away from financing new ethanol plants.

Fact: John May, Vice President of Stern Brothers and Co., a St. Louis, MO financial services company which acts as financial advisor to producers and developers of ethanol plants, said funding is available if developers have a plan that will survive lean economic times.

"Our view is we look now for clients that have technology like fractionation, higher output, lower operating costs, more flexibility and the ability to react to market factors," May said.

"In short-we look for plants that are going to continue to do well even if we have a long period of low ethanol prices."

May noted a sound strategy today is not to spend a great deal of capital in the early stages of production.

"Plants can have a strategy that allows for phasing in of these components such as fractionation," May said.

"We are looking for clients that have a long-term view."

Site location will continue to be a major factor.

Destination plants are now being proposed at the location where fuel is blended instead of plants sited where the feedstock is grown. "Finance markets are forcing developers to be a lot more thoughtful about what they do," May said.

Tax-Exempt Bonds

Stern Brothers has also developed a method to assist in financing new plants by selling tax-exempt bonds to finance a portion of the debt.

According to May, this allows the developer to borrow additional funding on longer terms as part of its financial package.

Traditional financial institutions require shorter terms such as five to seven years for ethanol plant projects. Bonds can be extended to 10 to 15 years.

May said tax-exempt bonds issued at the senior level alongside senior bank debt lower the cost of capital by approximately 2%.

"As material costs rose along with engineering procurement contractor (EPC) prices last year, Stern Brothers began to plan the structuring and selling of these bonds as subordinated debt with a second lien to institutional bond investors such as mutual funds," May said.

May pointed out that these subordinated bonds replace equity that would otherwise have to be raised.

He said that at a time when institutional equity in the United States is difficult to secure, the bonds represent an alternative financing technique.

"There are new markets opening for financing ethanol plants," May said.

"Tax-exempt bond markets have only been open for ethanol plants for a year or so."

Stern Brothers has been assisting private and public developers finance major capital projects since 1917.

The company has offices in St. Louis, MO; Kansas City, MO; Chicago, IL; Denver, CO; Los Angeles, CA; and Tampa, FL.

For more information, call 314-727-5519.

See Related Websites/Articles:

• Stern Brothers

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