Government Guarantees

April 28, 2012
Renewable Energy From Waste

Oftentimes, federal, state and local governments have an interest in supporting various policy goals, ranging from saving citizens’ money (lower taxes or power rates) and economic development goals (jobs), to explicit energy related motivations (alleviating dependence on foreign oil or reducing emissions).

Rather than fund projects directly, governments with an interest in a project can provide credit enhancement through a loan guarantee.

When a governmental entity provides a loan guarantee, the credit profile of the debt obligation changes from the risk that the project is able to meet its debt service obligations to the risk that the guarantor is able to meet its obligation to pay if the project falters.

Guarantees from state and local governments are often structured as a “Moral Obligation” on a Revenue Bond in which the governmental entity is not legally obligated to make any payments should the project falter, but morally obligated. This moral obligation is generally accepted by bond investors as binding given the negative impact failure to pay would have on its credit rating for other financings. Securing a Moral Obligation from a state or local government can take significant time, but permits the WTE or WTF projects to borrow based on the guarantor’s credit rating. Moral obligations are best secured from highly rated entities with an interest in supporting the project for sound policy reasons.

The U.S. government has a variety of departments and vehicles that can provide guarantees for WTE and WTF projects. Recently, the U.S. Department of Energy (DOE) has been administering two high profile loan guarantee programs for energy related projects known commonly as 1703 and 1705. Developers working with these programs may be deploying commercially proven technologies but face funding challenges due to large project size (multi-billion dollar projects) or less than ideal credit profiles. The DOE has been stepping in to absorb some of the credit risk through guaranteeing loans. However, the current political climate coupled with the statutory authority and available appropriation for funding the DOE’s 1703 and 1705 programs, projects that have not already applied are not likely to receive funding in the near future.

The U.S. Department of Agriculture (USDA) has a portfolio of programs with long histories, like the Business & Industry (B&I) Program, and relative newcomers like the 9003 Biorefinery Assistance Program supporting innovative technologies and the 9007 Rural Energy for America Program (REAP). In these programs the USDA guarantees a portion of the debt to elicit private sector funding of projects that would not have otherwise secured financing. Recent program changes have transformed these programs to allow bond financing as opposed to traditional bank financing. This change is enabling the creation of a new market for WTE and WTF project financings, moving away from banks that are unwilling to lend at any rate to bond investors willing to accept a lower credit profile with support from the federal government.

Often, WTE and WTF projects are using technology or technical expertise from foreign countries, opening the opportunity for accessing credit enhancement from an export finance agency. Most OECD (Organization for Economic Cooperation and Development, comprised of 34 member nations with elected governments and market-based economies) member countries have an export finance agency whose goal is to support the export sales of goods and services from their country. Playing a key role in short-term trade finance, most have project finance programs that can guarantee loans.

Many have a policy of supporting alternative energy and sustainability. Export finance agency financing require goods and service to move across borders meaning a WTE or WTF project in the U.S. would require securing a guarantee from a foreign country by using foreign technology or a foreign construction service provider.