The Challenge of Financing Renewable Fuels: A Chat With James Dack of Stern Brothers
The cleantech industry has a million different technology ideas out there, and just about as many financing strategies. There are mom-and-pop companies raising cash from friends and family, there’s venture capital, government grants, big energy company partnerships, and huge projects such as wind farms or ethanol refineries that rely on deep pockets in private equity like, say, BlackRock.
Much gets made of the role of federal support, subsidies, etc., in this business. One of the latest vehicles out there is from the U.S. Department of Agriculture, through what it calls its 9003 Loan Guarantee program. This essentially protects private equity investors from losing all their money in biorefinery projects, while leaving investors room for upside returns.
I got a bit of the download on this program, and why it’s important in the context of other financing alternatives, from James Dack, a vice president with Stern Brothers, a financial brokerage with offices here in Seattle. The approach is relevant to many entrepreneurs, including Blue Marble Energy’s Kelly Ogilvie, who will be attending Xconomy’s next event, “Separating Hype from Reality in Alternative Fuels,” on May 19.
Here are excerpts from the conversation with Dack, edited as always for length and clarity.
Xconomy: What do you guys do, and how has your business gravitated lately into cleantech financing?
James Dack: We are a project finance boutique investment bank. We place non-recourse project finance debt in the form of bonds into the institutional capital markets. So debt can be a loan or bonds. Bonds provide some liquidity features that make them interesting to institutional investors like insurance companies, pension funds, mutual funds, and some private equity and hedge funds.
X: How did you get interested in alternative energy?
JD: Our firm figured out a way to finance first generation ethanol plants using tax-exempt bonds. When compared to a taxable bond, it provided a lower interest expense, so people could borrow more cheaply. We did several pioneering transactions in first-generation ethanol.
X: OK, so what kind of project scale are you talking about doing now?
JD: These are project financings, to actually build the physical assets of a biofuel project. On the low end, they can be for $60 million to $70 million, all the way up to $300 million-plus. We’re a broker/dealer, so we structure the bonds and place them with buy-side clients who are the insurance companies, pension funds, mutual funds.
X: So you got a taste of this with the ethanol boom in the early 2000s, but how did those projects turn out? We hear a lot of negative press, especially on the West Coast, about the inefficiency of ethanol, especially corn-based ethanol.
JD: In the early 2000s, the way ethanol projects were financed, they were merchant projects. So they didn’t have what we’d call contracted cash flows. So you’d be subject to … Next Page »