By Marcin Lewandowski, Director of Risk & Analytics, Ecostrat Inc.
Many South American companies looking to develop bioenergy projects are seeking capital in the United States. However, the majority of these companies fail to convince American lenders and investors that their projects are viable (whether or not a project is actually viable). So what does it take to convince American financial institutions to supply capital to bioenergy projects?
Lenders and investors in the US, like everywhere else in the world, care about project risk. They want to make sure that money they lend or invest will be paid back. As project risk increases, so does the cost of money (i.e. debt cost), eventually reaching a point where the debt cost is too high for a project to become economically viable. For example, a 2% increase in debt cost to a $100MM project results in the increase of annual interest by $2MM.
Risk is not an exact science. Risk is fundamentally about perception. Just as an individual may incorrectly perceive flying as a more dangerous activity than driving (despite the fact that it is not), a lender/investor may perceive certain projects more risky than others based on incorrect assumptions. It is the role of the developer to demonstrate that project risk is low. The demonstration part is crucial here.
Bioenergy project risk can be divided broadly into three categories: 1) feedstock risk; 2) technology/operational risk; 3) market risk (note that political risk affects all three of these categories). In most cases, feedstock carries the highest variable cost on a bioenergy project, and therefore feedstock risk is the most significant risk for lenders and investors. Feedstock availability and price are also the most uncertain variables of the three risk categories above. As such, lenders and investors are really warry of feedstock risks. To put these institutions at ease therefore, a developer should conduct a detailed and comprehensive feedstock supply study demonstrating availability and price risks (or lack thereof) in the feedstock supply chain.
What should such study entail? Firstly, and most importantly, a good feedstock study has to be written in such a way as to convince its readers of its credibility. Believe it or not but the way a study is written, its logic, narrative, language, conciseness, structure, and even formatting, is really important for the study’s credibility. Again, lenders and investors are as prone to perception as anybody else.
But of course a study’s credibility also depends on the type of data provided and methods used to conduct analysis. If feedstock availability and price data are spotty or altogether lacking, there is no information to derive conclusions from, which renders a study non-credible. Similarly, if the methods used to analyze data are flawed, the conclusions derived from such analysis will be flawed as well, making the study of little value.
Consequently, when a bioenergy developer is in the process of proving the viability of the project to lenders and investors, it is best to hire a professional firm specialized in conducting feedstock assessments. Indeed, banks and investors in the US require that any feasibility study, including a feedstock risk assessment, be conducted by a third-party specialized company.
Successful bioenergy developers know the value of demonstrating credibility. The investment in a professionally conducted assessment almost always pays off in lower debt costs. Data and analysis are how American banks and investors operate these days, so demonstrating project viability through comprehensive and credible report is a must.