The Department of Energy ("DOE") recently announced the long anticipated Financial Institution Partnership Program ("FIPP") in connection with its loan guarantee program1. FIPP partners financial institutions with DOE in an attempt to restart the lending markets for conventional renewable energy technologies by providing partial loan guarantees used to finance commercially accepted renewable energy systems. Financial institutions will apply directly to DOE for a loan guarantee and DOE is expected to review each application with a primary focus on confirmation of the lender's internal underwriting and credit analysis. DOE has committed $750 million to pay the Credit Subsidy Costs associated with loan guarantees granted under FIPP which DOE expects will lead to approximately $4-8 billion in total loan guarantees for the renewable energy sector.
The maximum debt financing allowed under FIPP is 80% of the total project costs (the "Debt") and DOE will provide a full faith and credit guarantee up to 80% of the principal amount of the Debt (the "Guaranteed Portion"). Participating financial institutions will share in the risk associated with each loan under FIPP on a pari passu basis with DOE, as they will be expected to fund and retain all or a "substantial portion" of the Debt. Each financial institution participating in FIPP will be required to execute a loan agreement and guarantee agreement which will contain certain transfer restrictions on the Debt, provided, however, the guidelines for FIPP appear to allow the Guaranteed Portion to be separated from or "stripped" from the non-guaranteed portion of the Debt through participation, syndication or otherwise reselling in the secondary debt market.
While DOE and participating financial institutions will share in the risk associated with each Debt obligation, DOE will have the exclusive right to exercise all voting and control rights under the loan agreement. While there are certain exceptions, DOE will retain exclusive control over amendments, waiver, acceleration of the Debt and the exercise of remedies, including foreclosure on the collateral. Generally, in a syndicated loan, each of the syndication lenders will provide the lead lender discretion to make day-to-day decisions regarding the loan, however the syndication lenders would generally have consent rights for amendment, waivers, acceleration, etc. Under FIPP, DOE will generally retain exclusive control over the Debt which may prove troublesome for participating financial institutions as they are sharing in the risk without the benefit of control.
Eligible lead lenders will include financial institutions with experience in originating, servicing and acting as underwriter/lead lender for large commercial projects or energy related projects similar in size and scope to the project under consideration. Each financial institution, prior to submission of its application, is expected to evaluate and receive credit approval for the proposed loan in accordance with its standard internal credit policies. DOE review is expected to focus on an examination and confirmation of the lender-applicant's credit analysis. Assuming DOE relies primarily upon the lender-applicant's credit analysis and does not re-underwrite each loan guarantee, the participation of private financial institutions is expected to expedite the timeframe associated with obtaining loan guarantees.
Projects eligible under the initial solicitation are limited to renewable energy generation projects utilizing commercial technologies that are reasonably likely to commence construction on or before September 30, 2011 and are expected to have a credit rating equivalent of "BB" from S&P and Fitch or "Ba2" from Moody's. After submission of an application, but prior to DOE issuance of a conditional commitment, the borrower will be required to submit the project credit rating and will be required to provide a final credit rating 30 days prior to closing. All projects must commence construction by September 30, 2011 or risk the termination of any conditional commitment or loan guarantee without any further obligation to the lender, the proposed borrower or any project sponsor.
FIPP will entail a multi-step application process consisting of a Part I application, which includes a summary overview of the project, a Part II application, providing extensive detail on the project, execution of a "conditional commitment" and, finally, closing of the loan agreement and guarantee agreement. DOE is now accepting applications for Part I applications and lender-applicant's are encouraged to apply early to enjoy a "first mover's" advantage. After a Part I application has been received, DOE will notify the lender-applicant if the application was responsive and if the lender-applicant should submit a Part II application. DOE provides ten Part II submission deadline dates (or rounds) and DOE will competitively evaluate each application against each other Part II application submitted during a given round.
While DOE has committed funds to pay for the Credit Subsidy Costs associated with each guarantee, both the lender and the borrower are still required to pay certain application, facility and maintenance fees associated with the loan guarantee. In addition, the borrower or project sponsor will be responsible for paying the fees and expenses of all independent consultants and outside legal counsel engaged by DOE in connection with its review of each application.
The goal of FIPP is to expedite DOE's loan guarantee underwriting process by inviting private sector participation to accelerate the financing of renewable energy projects. While such a goal is admirable, there may be significant hurdles to the entrance of private financial institutions as partners. The potential high cost, lack of control and retention of significant risk may cause financial institutions to take a cautious approach to FIPP. Due to such caution, FIPP may not have the desired effect of stimulating lending as much as hoped for by DOE. While only time will tell if financial institutions are willing to bear the risks associated with FIPP, we are hopeful that if such issues do arise, DOE would be amenable to modifying FIPP to ensure that its important policy goals of accelerating the financing of renewable energy projects are achieved, and that Congress would be interested in hearing of any impediments to fulfillment of these policy goals.