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VeraSun Energy Files for Chapter 11 Relief

VeraSun Energy Corporation, Sioux Falls, SD, announced that it is seeking Chapter 11 bankruptcy protection on October 31. This announcement followed the company’s report of significant losses in the third quarter.

A large part of the problem was that VeraSun had locked in corn prices earlier this summer (when corn was near $8 per bushel) and then corn dropped to less than $5 per bushel. VeraSun also cited worsening capital market conditions and a tightening of trade credit for constraining its liquidity position.

VeraSun and 24 of its subsidiaries have filed voluntary petitions for relief under Chapter 11 to facilitate access to additional liquidity while they reorganize, the company reported. The company plans to maintain its operations and has taken steps to “ensure continued supply of product to its customers and to fulfill all customer obligations.”

VeraSun also reported that it does not expect to scale back its purchases of corn and other raw materials. It expects that suppliers will be paid in full for goods and services furnished after the filing data as required by the United States Bankruptcy Code.

The bankruptcy of any major ethanol producer is not a positive sign for the industry, says Todd Alexander, partner, Chadbourne & Parke LLP, New York. Alexander represents developers and lenders participating in U.S. and international biofuels financings. He has participated in the limited recourse financing of power projects in various countries.

A Sign?

But, the VeraSun Chapter 11 announcement may possibly be “a sign that operating margins have been squeezed to or close to their breaking point,” Alexander says.

“There is a general consensus that many ethanol facilities did not properly size their working capital lines to allow them to fully fund their margin calls,” Alexander says. “As a result, they were forced to accept losses that could have been better managed. In addition, ethanol producers’ ability to effectively lock in longer term ethanol sales contracts has greatly diminished as a result of the increased capacity that has entered the market during the last 12 months. This has made it more difficult for ethanol producers to manage their crush spreads and has made earning less predictable.”

The ethanol industry could face additional Chapter 11 filings. “We are working with several groups that are in the process of renegotiating their debt arrangements. If these negotiations break down, several transactions will wind up in bankruptcy court. However, for the most part, bank groups are cooperating with their borrowers to try to avoid bankruptcy filings. It is generally not in anyone's best interest to end up in bankruptcy court.”

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