Situation Overview

VeraSun Energy Corporation was, at one time, the largest producer of renewable fuels in the world. Following its successful IPO in 2008, VeraSun acquired three ethanol production facilities from ASAlliances Biofuels, only to merge with another competitor, U.S. BioEnergy Corp., soon thereafter. At its peak, VeraSun operated 16 ethanol production facilities with aggregate projected production rates of ~1.64 billion gallons and more than 5 million tons of distiller’s grains.

Less than one year after the merger, commodity prices continues to break through record highs with corn peaking at $7.54/bushel in late June 2008. In order to protect against further increases in corn prices, VeraSun entered into multiple agreements that secured future quantities and prices of corn with suppliers at below then-prevailing market rates. Unfortunately, shortly after these agreements were made, the commodity markets fell precipitously, with the price of corn dropping a staggering ~60% from June to December 2008. As a result, VeraSun was forced to pay a significant premium above market prices and incurred tremendous losses on operations. In short order, VeraSun saw its line of credit disappear and its ability to tap the broader financing markets was eliminated. Consequently, VeraSun filed for Chapter 11 bankruptcy protection in October 2008.

As an expert financial advisor with deep experience in the energy industry, Carl Marks Advisors was engaged by the senior secured lenders to the U.S. BioEnergy assets, which represented 7 of the 16 ethanol production facilities, to advise and assess the operational and financial strategic alternatives available to the lender group.

Unique Challenges

Worsening capital market conditions and a tightening of trade credit resulted in severe constraints on VeraSun’s liquidity position. The company was forced to file for bankruptcy in order to address short-term liquidity issues with intentions to restructure and maintain operations. However, as corn prices remained suppressed, the commodity markets experienced simultaneous decreases in ethanol and oil just as the global credit crunch was intensifying. VeraSun was locked into paying above-market prices for corn and it quickly became even more difficult to obtain financing. Ultimately, VeraSun was unable to secure the funding necessary to pay interest on its debts.

In combination with the volatile market conditions in the ethanol industry, VeraSun’s capital structure was particularly challenging. The debtor had numerous credit facilities supporting various groupings of collateral production facilities inherited from prior roll-up strategies and acquisitions.

Results

Carl Marks Advisors was instrumental in organizing 17 different lender entities to develop a consensual credit bid strategy, while protecting the value of the U.S. BioEnergy collateral ahead of the auction. Carl Marks Advisors maximized the value of the senior lender group’s collateral through multiple, defensive debtor-in-possession financings and several §363 credit bid strategies and acquisitions. The result of Carl Marks Advisors’ multi-faceted approach was the sale of one facility to Valero Energy Corporation at the bankruptcy auction and the development of a successful credit bid strategy for each of the remaining six facilities. The team at Carl Marks Advisors provided post-acquisition financing and transition services to maintain operations throughout the secondary sale processes to third parties. Less than seven months after emerging from bankruptcy, the remaining six collateral facilities were sold, restoring value to the lenders and maximizing opportunity in an entirely different operating environment.

Key Takeaways

  • The ethanol industry can be extremely volatile, due in part to the fact that value to producers is heavily tied to two uncorrelated commodities – corn and ethanol. Because the margins for corn and ethanol can be inverted, producers’ capital structures need to have operational flexibility to adjust for this potential disparity.
  • Organizing a large group of lenders, with conflicting interests and objectives, to reach a consensus is a very complex negotiation process. Credit bidding can be a useful strategy to restore value for creditors and maximize opportunities during a bankruptcy filing – especially when numerous credit facilities are tied to collateral and prevailing margins are extremely low.
  • Volatility in the market has taught ethanol producers not to speculate on the market, to maintain low risk, and to become as efficient as possible. It is also important to note that many plants were built during the boom based solely on having available land. However, any successful ethanol facility requires local support, investors, a reliable and abundant corn supply, as well as efficient transportation infrastructure in order to thrive and withstand market fluctuations.