The Solyndra guarantee

Sep 23, 2011

Solyndra did what it said it would do with taxpayer money. But should it have been asked to do more?

A lot of Solyndra coverage has focused on the Department of Energy loan restructuring and resulting repayment priority, and we've certainly done our share. But I'm also interested in the original $535 million loan itself, which was designed to finance the construction of a large new manufacturing facility (which was, in fact, completed).

In other words, it was project financing. But there are two types of project financing in the energy sector: Those focused on energy generation, which comes with long-term offsets (i.e., contracts) from credit-worthy purchasers, and those that back energy product manufacturing, which are against the hope of future contracts rather than tangibly executed ones.

Most DoE cleantech loans are the former, but Solyndra was the latter. More importantly, an Administration official acknowledges that all milestones (i.e., requirements to call down capital) were technical. Finish a room, install a machine, etc. The only company-specific condition was that Solyndra raise a couple hundred million in new equity (which it did). No keyman provisions on Solyndra management, no working capital ratio covenants or anything else (revenue would be irrelevant, since the loan was to create the conditions for significant revenue). Let alone some sort of material adverse clause (MAC) tied to the broader solar market.

Still not sure how I feel about this. On the one hand, energy finance attorneys tell me that such an arrangement is industry standard for manufacturing project finance (which is rare, as most of these products are done via corporate credit). The idea of a macro MAC is completely foreign -- like tying capital calls to global solar cell prices – and even company-specific milestones are uncommon so long as there is a corresponding equity commitment.

So while DoE did as the private markets do, it also didn’t take advantage of the fact that it was lender of last resort. Loan program boss Jonathan Silver said during Congressional hearings last week that Solyndra would have failed without the loan guarantee. So why not cover themselves a bit more by insisting on more stringent covenants?

Maybe the equity investors would have balked. And maybe the company-specific covenants wouldn’t have been written in a way that anticipated the massive drop in solar prices and recessionary factors that made Solyndra’s business plan unworkable. But why not at least try? Perhaps a lesson for next time. Well, if DoE is allowed to have a next time...

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