USDA Makes Substantial Changes To Its Section 9003 Biorefinery Assistance Loan Guarantee Program For Advanced Biofuels Including Qualifying Renewable Chemical And Biobased Manufacturing Projects
On June 24, 2015 the Rural Business Cooperative Service of the United States Department of Agriculture (“USDA”) issued an Interim Final Rule making changes to the USDA’s Biorefinery, Renewable Chemical, and Biobased Product Manufacturing Assistance Program (“the Program”). 80 Fed. Reg. 36410 (June 24, 2015) (“Interim Final Rule”) (see new rule at http://www.gpo.gov/fdsys/pkg/FR-2015-06-24/pdf/2015-14989.pdf). Formerly referred to as the Biorefinery Assistance Program, the Program provides loan guarantees of up to $250 million of senior debt for the development, construction, and retrofitting of new and emerging technologies for the development of Advanced Biofuels, Renewable Chemicals, and Biobased Products. The Interim Final Rule expands the scope of projects eligible for loan guarantees and also implements significant changes intended to make the Program friendlier to large institutional Lenders and project-finance-oriented loan and collateral structures.
The Program was initially established under the Food, Conservation, and Energy Act of 2008, P.L. 110–234 (“2008 Farm Act”), and provided loan guarantees only for commercial-scale biorefineries using certain technologies and targeting the production of Advanced Biofuels. USDA has removed grants, which were authorized in 2008 Farm Bill, from the Program. Reauthorization of the 2014 Farm Act permitted changes to Section 9003 of the Agricultural Act of 2014, P.L. 113-79, 7 U.S.C. 8103 (“2014 Farm Act”), renewed funding for the Program, expanded it to cover renewable chemical and Biobased Products manufacturing facilities, and made certain other changes. The Interim Final Rule implements the changes required by the 2014 Farm Act and also addresses public comments received in a rulemaking under the prior interim final rule implementing the provisions of the 2008 Farm Act. 76 Fed. Reg. 8404 (Feb. 14, 2011). The Interim Final Rule also includes a finance framework and administrative improvements based on the USDA’s experience with the Program.
To date, the Program has obligated funds for three (3) loan guarantees and six (6) conditional commitments. According to USDA, these funding obligations will result in approximately 100 MMGY of Advanced Biofuels from approximately $750 million of Program funding.
Major changes to the Program in the Interim Final Rule include:
Changes to the Program, according to USDA, are prospective and not retroactive. The Interim Final Rule, which revises 7 C.F.R. part 4279, subpart C, and 7 C.F.R. part 4287, subpart D, will remain in effect indefinitely, or until USDA promulgates a successor rule. Any comments to the Interim Final Rule are due to USDA on or before August 24, 2015.
The 2014 Farm Act provides $100 million of mandatory funding for the Program for FY 2014 and $50 million of mandatory funding for each of FY 2015 and FY 2016, potentially available to project applications submitted in response to the Notice of Solicitation. However, the 2015 Consolidated and Further Continuing Appropriations Act, P.L. 113–235, reduced the $50 million for FY 2015 to $30 million (with the $20 million balance available for FY 2016 in addition to its $50 million mandatory funding amount) or $130 million of available mandatory funding for FY 2014 ($100 million) and FY 2015 ($30 million). FY 2016 funds could be as high as the additional $20 million from FY 2015 plus the $50 million mandatory 2014 Farm Act funds and any carry over from earlier rounds. Thus, available Program mandatory funds can be as high as $200 million for FY 2014 – FY 2016.
Furthermore, the overall Program subsidy scoring by the Office of Management and Budget (“OMB”) could be from 3-to-1 to 4-to-1 of these amounts based on historical scoring. Additionally, since the USDA has had recent successes in its Program, the subsidy scoring could move to the higher level. Thus, available Program funding could be between $600 million and $800 million in loan guarantee authority from the aggregate FY 2014 – FY 2016 available mandatory funds of $200 million for this Notice of Solicitation after subsidy scoring (the “Available Program Funding”). However, pending House legislation (H.R. 3049) could reduce this Available Program Funding, if ultimately enacted. (Available Program Funding also is affected by subsidy scoring on a project-by-project basis, as applicant awardees execute their respective conditional commitments).
USDA also requires up to 15% of the mandatory funding of $130 million for FY 2014 and 2015 (when the restriction is effective) (or approximately $19.5 million) to be set aside to provide loan guarantees to promote Biobased Product Manufacturing. With respect to credit subsidy-scored Available Program Funding of $390 million (3 to 1) to $520 million (4 to 1), this 15% funding would be in a rage of $58.5 million to $78 million. This set-aside, however, is not provided expressly for FY 2016 mandatory funds.
The 2014 Farm Bill also enables Congress to approve an additional $75 million of discretionary funding for FY 2014 through 2018. Nevertheless, Congress has never appropriated any of the identified discretionary funding since the 2008 Farm Act established the Program. Moreover, since the 2014 Farm Act provided no mandatory funds to the Program for FY 2017 and FY 2018, interested potential Program applicants must move quickly to participate in the current Notice of Solicitation.
Eligibility Criteria for Program Loan Guarantees
Types of Eligible Projects (7 C.F.R. § 4279.210)
Program funds may be used to fund the development, construction and retrofitting of the following types of projects:
These terms are defined (in 7 C.F.R. § 4279.202) as follows:
A Biorefinery is a facility that converts Renewable Biomass into Biofuels and Biobased Products. To be eligible to participate in the Program, a Biorefinery must produce some quantity of Advanced Biofuels (as defined below). However, this requirement need not be a majority of its production as under the previous Program rules. A Biorefinery also may produce electricity.
A Biofuel is any fuel derived from Renewable Biomass. An Advanced Biofuel is one derived from Renewable Biomass, other than corn kernel starch. This definition includes:
Biobased Products include commercial or industrial products, intermediate ingredients, or feedstocks composed, in whole or in significant part, of biological products, including renewable domestic agricultural materials and forestry materials. They do not include products intended for use as food which otherwise are aligned with the Section 9002 Biobased Purchasing Program. However, Renewable Chemicals that are food-grade are qualified Biobased Products.
Renewable Biomass is defined broadly to encompass renewable agricultural commodities including feed grains and other plant material grown on non-Federal or Indian lands, as well as certain vegetative materials removed from public lands, if that material would not otherwise be used for higher-value products. That said, as mentioned, while corn kernel starch may not be used as feedstock for Advanced Biofuels, it is available for use as feedstock for Renewable Chemicals and Biobased Products.
A Renewable Chemical is a monomer, polymer, plastic, formulated product, or chemical substance produced from Renewable Biomass.
Commercial Scale: To be considered “Commercial Scale”, a project must demonstrate that:
Eligible technology means:
A Technologically New technology consists of new or significantly improved equipment, process or production methods to deliver a product; or the adoption of equipment, process or production method to deliver a new or significantly improved product, of which the first commercial-scale use in the United States is within the last five (5) years and which is used in not more than three (3) commercial-scale facilities in the United States. This definition applies only Biobased Product Manufacturing and not to a Biorefinery. It is similar to that in the United States Department of Energy (“DOE”) Section 1703 Loan Guarantee Program.
Moreover, also similar to the DOE Section, 1703 Loan Guarantee Program, a Program applicant could apply for funding for more than one (i) stand-alone project at different sites under the same application or (ii) related facilities applicable to the main project facility and at different locations. In each instance, the overall application would be subject to Available Program Funding, specific Program funding limits and other requirements. Further, such an application is applicable for each of Biorefineries and Biobased Product Manufacturers.
The following types of Borrowers may be eligible for loan guarantees under the Program:
Certain Borrowers, however, with outstanding Federal Court (non-Tax Court) judgments, delinquent Federal income tax or Federal debt payments, or debarred or suspended from Federal assistance are ineligible.
Lender Eligibility (7 C.F.R. § 4279.208)
The following types of Lenders may be eligible to participate in the Program, if they have sufficient expertise and experience as well as the legal authority to do so:
To be eligible, a Lender must also meet the FDIC’s definition of “well-capitalized” at the time of the application and note issuance. (12 C.F.R. § 325.103(b)(1).)
Savings and loan associations, mortgage companies, insurance companies and other Lenders not meeting the above eligible Lender criteria are not eligible.
The Interim Final Rule establishes a two (2)-phase application process, which is similar, but not identical, to the DOE Section 1703 Loan Guarantee Program’s Part 1 and Part 2 application process. In Phase 1, applicants provide information to determine Lender, Borrower, and project eligibility; preliminary economic and technical feasibility; and the priority score of the application, as determined by criteria discussed below. USDA will evaluate applications based on these scoring criteria and invite the highest-ranked Phase 1 applicants to submit Phase 2 applications. Phase 2 application materials will be submitted as the project planning and engineering are finalized and must include an environmental report, technical report, financial model, and the Lender’s credit evaluation. Phase 2 materials are required for final approval of loan guarantees by USDA.
At least 30 days prior to submitting a Phase 1 application, a prospective applicant must submit a letter of intent to the USDA identifying the Borrower, the Lender, and project sponsors. The notice must also describe the project and project location, proposed feedstock, the primary technologies of the facility, the primary products to be produced, and total project cost estimate. In addition, applicants must be pre-registered with the System for Award Management (“SAM”) and also have a Data Universal Number System (“DUNS”) number. Information on SAM is available at https://www.sam.gov/portal/SAM/##11. DUNS may be accessed at http://fedgov.dnb.com/webform.
Phase 1 Applications and Loan Scoring Criteria
Phase 1 application materials must include the following:
Applications must be submitted both electronically and in hard-copy. Application materials, an application guide, and other information are available on the Program’s web site at http://www.rd.usda.gov/programs-services/biorefinery-renewable-chemical-and-biobased-product-manufacturing-assistance.
Phase 1 Scoring Criteria
Phase 1 applications are scored on a point system (on a scale of 125 possible points with a minimum score of 55 points necessary for loan guarantee consideration), with different criteria used to evaluate applications for Biorefineries and Biobased Product Manufacturing facilities. The criteria for Biorefineries are set forth in 7 C.F.R. § 4279.266. They include items such as the following:
The USDA also has discretion to award up to 10 points to promote “diversity” among the types of technologies, products, and approaches embodied in the projects for which guarantees are approved. As part of its review, USDA seeks to select projects that promote partnerships and other activities which advance goals such as U.S. energy independence; promote resource conservation, public health, and the environment; diversify markets for agricultural and forestry products and agriculture waste material; and create jobs and enhance the economic development of the Rural economy. Such partnerships and other activities are identified in the Federal Register notices soliciting applications each year. (No additional information on such partnerships is included in the Notice of Solicitation.)
The criteria for evaluating applications for Biobased Product Manufacturing projects are similar to the criteria for Biorefineries, but are weighted somewhat differently. These criteria are set forth in the Notice of Solicitation. 80 Fed. Reg. 38433.
Phase 2 Applications and Loan Approval
In Phase 2, applicants selected by USDA submit more detailed project information to enable USDA to evaluate the loan for approval. Application materials required in Phase 2 include the following:
The Phase 2 loan approval criteria are changed significantly under the Interim Final Rule. Credit evaluation is more flexible, and allows more reliance on the Lender to exercise professional judgment (7 C.F.R. § 4279.215). Collateral evaluation is also more flexible, and allows the use of more project finance-oriented collateral (7 C.F.R. § 4279.235). In addition, Lenders are afforded more latitude to rely on third-party evaluations in discharging their own diligence obligations.
Applications for loan guarantees may be approved as their Phase 2 applications are completed and approved (7 C.F.R. § 4279.278).
Funding Availability and Requirements
The maximum principal amount of a loan guaranteed for up to 20 years under the Program is $250 million. (7 C.F.R. § 4279.232(b)) There is no minimum loan amount. The total amount of Federal participation in a project (including the loan guarantee plus other Federal funding) may not exceed 80 percent of total Eligible Project Costs. However, USDA generally may guarantee senior debt: (i) between 60 percent and 80 percent with 20 percent of Eligible Project Costs funded from non-Federal sources including significant sponsor cash equity determined by USDA on a case-by-case basis, and (ii) 90 percent with at least 40 percent funded from non-Federal sources including significant sponsor cash equity determined by USDA on a case-by-case basis, with certain additional requirements for each percentage guarantee coverage. Interest rates on senior debt may be fixed, variable or a combination of both. Eligible Project Costs are listed in the Interim Final Rule, including as follows:
7 C.F.R. § 4279.210(d). Specifically ineligible costs include as follows:
In addition, the Program requires that the Borrower and other principals involved in the project have a “significant” equity investment in the project in the form of a cash contribution. The amount required is to be determined on a case-by-case basis as part of the credit evaluation of the project. (7 C.F.R. § 4279.210(c).)
Loan terms other than interest must be the same for the guaranteed and unguaranteed portions of the loan.
Recipients of loan guarantees must pay guarantee fees of one (1) to three (3) percent, depending on the percentage of the loan guarantee. (7 C.F.R. § 4279.231(a).) Annual renewal fees of one-half (0.5) percent to one (1) percent are also owed, based on a percentage of outstanding principal and the percent of the guarantee. (7 C.F.R. § 4279.231(b).)
Practical Impacts of Interim Final Rule
The USDA anticipates that the Program changes required by the 2014 Farm Bill and implemented by the Interim Final Rule will have a number of practical impacts. It expects that the changes implemented by the Interim Final Rule will make the Program more attractive to larger, more sophisticated Lenders which are under more regulatory scrutiny than the Lenders that have historically participated in the USDA’s guaranteed loan programs. USDA also expects that the Interim Final Rule will increase diversity in projects funded under the Program. Furthermore, the Agency expects these changes to improve the financial feasibility of the Biorefineries supplying Renewable Chemicals and other Biobased Products to manufacturing facilities because Renewable Chemicals and Biobased Products typically are of higher value than Advanced Biofuels.
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Mark J. Riedy
Steven J. Levitas
Benjamin L. Snowden