When the DOE loans don’t help but hurt

Updated: There’s been a similar sentiment from both companies that received loan guarantees from the Department of Energy and then declared bankruptcy: The terms of the loans were too onerous. Flywheel maker Beacon Power said as much in its bankruptcy filings, stating that it was partly unable to secure additionally needed funding due to the DOE’s financing terms.

Beacon Power filed for bankruptcy on Sunday, and it had drawn down on $39 million of a DOE loan to build a 20 MW flywheel plant in Stephentown, N.Y., that cost $69 million. Solar maker Solyndra filed for bankruptcy about two months ago after it drew down on $527 million of a $535 million DOE loan to build a solar panel factory in Fremont, Calif.

Solyndra investors expressed the same sentiments about the restrictive terms of the government loans to the Wall Street Journal earlier this year. In that report, investors said that the DOE debt made it harder to raise more money from private investors because the government demands priority in the event of failure, and private investors are then less likely to be willing to prop up the company. However, in the federal government’s restructuring of Solyndra’s loan earlier this year, it ended up enabling private investors to have senior debt (i.e., debt that will be paid back first) for part of the funds.

In addition to the conflict between private investors and the government about who should get paid back first in a bankruptcy event, the DOE loan put large fixed costs on Solyndra, said the Solyndra investors in the WSJ report. Essentially the loan was attached to the plant, so the company couldn’t change plans or be nimble without losing the loan. A Solyndra investor told the WSJ that “the worst thing that happened to Solyndra was the loan.”

Loan restrictions

NRG Energy CEO David Crane told me in an interview earlier this year that the government has been requesting more and more conservative terms, which may be comforting from the point of view of being a taxpayer but defeats the purpose of a program meant to provide debt financing where it wasn’t available from the private sector. “If the government’s terms are more onerous than the private sector then it becomes sort of, what’s the point?” said Crane.

Some companies realized some of these restrictions and decided not to pursue DOE loans. Solar company Suniva abandoned its DOE loan plans in March and told us in an email that it was partly because of continued uncertainty around the negotiation of acceptable terms.

Workers inspecting panels in Solyndra's factory in April

Constellation Energy did the same thing, and after two years of pursuing a $7.5 billion loan, it declared the proposed terms and conditions for the guarantee “unworkable” in Oct. 2010. Together with French energy giant EDF, through a joint venture called UniStar Nuclear Energy, Constellation had requested the loan guarantee to support construction of a new nuclear reactor at the Calvert Cliffs power plant in southern Maryland. The chairman of UniStar and COO of Constellation Energy, Michael Wallace, said the credit subsidy cost associated with the loan (the expected long-term liability to the federal government when it issues the loan guarantee) was “shockingly high” and “would clearly destroy that project’s economics.”

Ted Sullivan, an analyst with Lux Research, told us that he thought the DOE loan program was “incredibly helpful during the depths of the recession” but that it becomes less useful if companies can get private funding with better terms. Sullivan said that at one point there was something like a 5 percent spread between DOE debt and private debt for startups, which he said was “huge.” But when private capital becomes more available, “spreads have tightened,” and the program ends up offering less of a boost.

Future of the DOE loan program

The loan guarantee program (Update: This is the 1705 program) officially expired on Sept. 30, and all of the loans had to be finalized by then. In the final weeks of the program some of the companies lost their conditional loan guarantees, like Solar City and First Solar (s FSLR), because of the time crunch and potentially raised scrutiny on the deals.

Last week the White House ordered an independent 60-day review of the loan program, in order to assess how well the companies that received loans are doing. The review will be conducted by former Assistant Treasury Secretary Herb Allison, who oversaw the Troubled Asset Relief Program and helped stabilize the financial sector. Previously the loan program has been investigated and was supposed to be streamlined.

I would bet that the program gets cut from next year’s budget: It’s just had too many high-profile problems. Loan chief Jonathan Silver resigned last month.

Image courtesy of Mark Coggins, randwill