DOE's Loan Guarantee Proposal Penny-Wise and Pound-Foolish, Say Commentators

On May 16, the Department of Energy (DOE) published its Notice of Proposed Rulemaking (NOPR) regarding loan guarantees for projects that would employ renewable energy systems, advanced nuclear facilities, and carbon sequestration units, among other innovative technologies.  In comments on the NOPR, lending and rating institutions slammed the proposal.

The Energy Policy Act of 2005 (EPAct 2005) authorizes DOE to guarantee loans "not to exceed an amount equal to 80 percent of the project cost of the facility."  In the  NOPR, however, DOE proposed to guarantee up to only 90 percent of a particular loan rather than 100% of a loan covering 80% of project cost.  DOE's proposal also prohibited selling off or "stripping" the guaranteed portion of the debt instrument because DOE wishes (1) to preclude the guaranteed portion of the loan from being sold and (2) to ensure that the lender and later debt holders maintain the same level of financial risk in the project as when the debt was issued in order to spur continued due diligence.

Credit Suisse, Lehman Brothers, Goldman Sachs, Merrill Lynch, Morgan Stanley, and Citigroup expressed concern that the proposed rule "is not workable" because it relegates 10 percent of project debt to an un-guaranteed, deeply subordinated tranche, and, by barring stripping, prevents marketability of the debt instrument.  The "hybrid instrument" created by the NOPR, they explained, has no natural market, and "the higher costs associated with financing [it] would deter sponsors from moving forward . . . [or] increase the risk of default."  Goldman Sachs also submitted very similar comments separately.

Standard & Poor's echoed concerns over the 90 percent guarantee limit and prohibition against stripping.  S&P cautioned that the "rating associated with a partially guaranteed obligation will be substantially lower than the 'AAA' rating of a fully guaranteed instrument" and will result in "a significantly higher cost of debt for the project than if it was fully guaranteed."  A 100 percent debt guarantee and/or removal of the no stripping requirement would lower the cost of debt and is likely essential to "the early commercial use of innovative technologies."

Banc of America Securities, LLC concluded that EPAct itself made clear that 100 percent of the loan is to be backed by the full faith and credit of the United States and the NOPR's proposal is consequently inconsistent with the statute.   The Electric Power Supply Association echoed this congressional intent argument when it urged DOE to guarantee 80 percent of the total project cost and up to 100 percent of the amount borrowed.  The Public Service Commission of Florida agreed, adding that the loan guarantee program "was intended to support the deployment of new technologies that reduce, avoid or sequester greenhouse gas emissions by providing a [100 percent] guarantee for up to 80 percent of project costs," not 90 percent of 80 percent of project costs.