The loan guarantee program, initially established by Section 1703 of the Energy Policy Act of 2005 (“EPAct”), authorizes DOE to make loan guarantees to promote innovative energy technology projects that “avoid, reduce or sequester air pollutants or anthropogenic emissions of greenhouse gases; and employ new or significantly improved technologies as compared to commercial technologies in service in the United States at the time the guarantee is issued.” Although this Final Rule officially applies to innovative technology solicitations, we believe that the principles contained in the Final Rule are likely to be applied in connection with the Financial Institution Partnership Program solicitation for renewable energy generation projects announced by DOE on October 7, 2009.
The Final Rule makes several changes to the existing EPAct regulations, each providing additional flexibility for DOE to make a case-by-case determination of the security for the loan. First, the Final Rule no longer requires that DOE receives a first lien on all project assets, providing DOE with additional flexibility to determine an appropriate collateral package for each project. DOE now believes that a first lien on all project assets is better understood as merely one element that DOE may require for a particular project, but one that it is not compelled by statute to be required. In response to expressions of interest received from Export Credit Agencies (“ECAs”) concerning their participation in eligible projects as co-lenders, co-guarantors, or insurers of loans, the Final Rule now contemplates the possibility of DOE, with other sources of financing (such as ECAs or municipal bond financing), sharing, on a pari passu basis, the collateral pledged to secure the borrower’s debt obligations.
Second, related to DOE’s acceptance of pari passu structures, the Final Rule retreats from the unitary project ownership structure that was implicitly anticipated by the earlier regulations. The Final Rule recognizes that a “tenancy in common” ownership structure occurs frequently in financing energy generating facilities.
Third, DOE has made technical adjustments to the definition of “Intercreditor Agreement” in the Final Rule. Again, this change will provide flexibility in negotiating Intercreditor Agreements with the lenders so long as they are “in form and substance satisfactory to DOE.”
The Final Rule provides for shorter or faster amortization schedules for the non-guaranteed portion of the project-related financing than for the guaranteed portion. Different amortization schedules are permitted if DOE determines that the resulting financing structure of the project (1) allocates to DOE a reasonably proportionate share of the default risk in light of (a) DOE’s share of the total project financing, (b) risk allocation among the credit providers, and (c) internal and external credit enhancements; and (2) is appropriate to (a) assure reasonable prospect of repayment of the principal and interest on DOE guaranteed portion of the financing, and (b) protect the interest of the United States in the case of default. This change ensures that the loan guarantee program does not exclude financial institutions that may require repayment on shorter amortization schedules than DOE-guaranteed loan.
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