On October 7, 2009, the Department of Energy ("DOE") announced that it will provide up to $750 million from the American Recovery and Reinvestment Act of 2009 ("Recovery Act") to help accelerate the development and financing of certain renewable energy generation projects. To accomplish that goal, the DOE has created a new Financial Institution Partnership Program ("FIPP") that will improve upon and expedite the existing DOE loan guarantee program by facilitating private sector participation for certain commercial technology renewable energy generation projects.
The October 7, 2009 DOE Loan Guarantee Solicitation Announcement (the "Solicitation," available at www.lgprogram.energy.gov/keydocs.html), invites Lender-Applicants (defined below) to submit applications for partial, risk-sharing loan guarantees from the DOE to promote debt financing for renewable energy projects intended to generate electricity or thermal energy, and that utilize commercial technology ("Commercial Technology Renewable Energy Generation Projects").
The Solicitation, the first FIPP solicitation and the eighth solicitation under The Energy Policy Act of 2005 ("2005 EPA"), encourages project sponsors and proposed borrowers to work with financial institutions that satisfy the DOE's requirements to access a loan guarantee. The funding offered by the Solicitation is expected to support as much as $4 billion to 8 billion in lending to eligible projects, and the intent is that the streamlined set of standards for FIPP will expedite DOE's loan guarantee underwriting process.
Application Guidelines for this Solicitation – Who is eligible to apply under this Solicitation and for what sort of project(s)?
Eligible Applicant: The applicant under the Solicitation must be a "Lender-Applicant," which means a financial institution, or one of a group of financial institutions, that satisfies the requirements of a "Lead Lender" (listed below), and funds and holds all or a portion of the guaranteed obligation in accordance with the obligations of Attachment I to the Solicitation, and as set forth in the Loan Guarantee Agreement and related documentation. A Lead Lender must meet the following qualifications of an "Eligible Lender": (1) not be debarred or suspended from participation in a federal government contract or participation in a non-procurement activity, (2) not be delinquent on any federal debt or loan, (3) be legally authorized to enter into loan guarantee transactions, and in good standing with the DOE and other federal agency loan guarantee programs, (4) be able to demonstrate or have access to experience in originating and servicing loans for commercial projects similar in size and scope to the project under consideration, and (5) be able to demonstrate experience or capability as the lead lender or underwriter by presenting evidence of its participation in large commercial projects or energy-related projects. Project sponsors and borrowers may not apply to the DOE directly under the Solicitation at this time.
Project Type: The Project must be a Commercial Technology Renewable Energy Generation Project. Commercial Technology means a "technology in general use in any commercial marketplace at the time the term sheet is issued by the DOE," and "general use" means "it has been installed in and is being used in three or more commercial projects anywhere in the same or substantially similar general application as in the proposed project, and has been in operation in each such commercial project for a period of at least two years." The Solicitation provides the following examples: wind facility, closed-loop biomass facility, open-loop biomass facility, geothermal facility, landfill gas facility, trash-to-energy facility, hydropower facility, and solar facility.
Construction Commencement: The project must be reasonably likely to commence construction on or before September 30, 2011, and failure to commence construction by such date will result in a termination of the DOE's loan guarantee. A project that has already commenced construction may be eligible (unless it has received a commitment for post-construction financing before issuance of the loan guarantee), but a project that has already completed construction is ineligible for the loan guarantee program.
Credit Rating: The guaranteed obligation must be expected to have a credit rating from a nationally recognized rating agency of at least equivalent to a "BB" from Standard & Poor's or Fitch, or "Ba2" from Moody's as evaluated, in each case, without the benefit of any DOE loan guarantee or other credit support.
Davis-Bacon Requirements: There must be adequate assurance that all laborers and mechanics employed in the performance of the project will be paid wages at rates not less than those prevailing on similar work in the locality of the project, in compliance with the Davis-Bacon Act.
Other Threshold Determinations: Applications will be denied if the project will be built or is located outside the United States, is not ready to be employed commercially, or is for demonstration, research or development. Applications also will be denied if the project sponsor or proposed borrower will not provide an equity contribution.
The eligibility requirements discussed above are intended to be a brief summary, and not an exhaustive list, of the Solicitation's eligibility requirements. Any party interested in seeking a loan guarantee from the DOE under the Solicitation also should review and consider all applicable requirements of the 2005 EPA, the Recovery Act (including reporting, record-keeping and Buy-American requirements provided therein), the National Environmental Policy Act, the Federal Credit Reform Act of 1990, and the Solicitation (including Attachments A-J thereto).
Application Process for this Solicitation – How does an interested Lender-Applicant apply?
The application process is divided into two parts, where Part I gives the DOE summary information to determine general eligibility for the loan guarantee program, and a more detailed Part II that gives the DOE additional information to determine whether or not the project should receive a loan guarantee. There is no hard deadline for the Part I submissions; however, the DOE will evaluate applications on a rolling basis and has encouraged interested Lender-Applicants to submit their applications as soon as possible. Lender-Applicant must submit and receive approval of its Part I submission before it can proceed with its Part II submission. The Application Fee is $50,000 ($12,500 to be submitted with the Part I submission and $37,500 to be submitted with the Part II submission).
If Part I of the Lender-Applicant's application is successful, the DOE will notify the Lender-Applicant and the Lender-Applicant can decide whether or not to proceed with Part II of the application process. The DOE will consider the Part II submissions in 10 rounds of review, where all Part II submissions during any such round of review shall be competitively evaluated against all such filings submitted during that round. The first round of review requires a Part II submission by 11:59 p.m. Eastern Time November 23, 2009, and the 10th and final round of review requires a Part II submission by 11:59 p.m. Eastern Time January 6, 2011 (with the other eight rounds spread throughout 2010).
The DOE will review the Part II submissions based on a weighted set of criteria: programmatic issues (readiness of project for financing/likely speed to closing, size and nature of project, legal and regulatory factors, etc.) (35 percent); creditworthiness (45 percent); and financing and funding plan (20 percent). After the DOE has completed its review of the Part I and Part II submissions, the DOE may provide the Lender-Applicant with a non-binding term sheet. If both parties execute the term sheet, it becomes a conditional commitment and the Lender-Applicant is obligated to pay a portion of the "Facility Fee" (1/2 of 1 percent of the guaranteed portion of the guaranteed obligation).
To enter into a Loan Guarantee Agreement at the loan closing, the Lender-Applicant and proposed borrower must have satisfied all of the detailed terms and conditions contained in the conditional commitment and other related documents, and all other contractual, statutory and regulatory requirements, and the DOE must have received authority in an appropriations act for the loan guarantee. At the loan closing, in addition to the exchange of the necessary documents (executed and authorized), the DOE must receive the Credit Subsidy Cost (defined below) from the Lender-Applicant/borrower or through an appropriation; the Lender-Applicant must pay the remaining portion of the Facility Fee; and the Borrower must pay the first annual Maintenance Fee (expected to range from $10,000 to $25,000). The Credit Subsidy Cost is the expected long-term liability to the federal government in issuing the loan guarantee, calculated as the estimated cash flows for payments to the government to cover defaults and delinquencies, interest subsidiaries, and other payments, less payments to the government, including origination and other fees, penalties, and recoveries.
Loan Structuring and Financial Considerations
Interested applicants should also consider the financial restrictions on the DOE loan guarantees, including the following: (1) the "guarantee percentage of the guaranteed obligation is limited to no more than 80% of the maximum aggregate principal amount of, and interest on, the guaranteed obligation during its term," and (2) "the guaranteed obligation is expected to be "traditional" senior secured debt, structured in accordance with customary market terms applicable to a high-quality, limited or non-recourse, long-term, energy project financial transaction and not modified to accommodate tax-oriented investment structures." Attachment I to the Solicitation provides information on loan structuring and required terms and conditions, and the DOE's Loan Guarantee Agreement forms will be posted on its loan guarantee program website.