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USDA Official Answers Questions Re: Loan Guarantee Program in Ethanol Financing Flap

00:00AM Oct 22, 2008

via a special arrangement with Informa Economics, Inc.

'No bailout' program, says USDA official; 'not targeted' to ethanol or any other specific business

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

Ever since USDA Secretary Ed Schafer last Friday in Des Moines mentioned a loan guarantee program begun in 1974 that could help ethanol facilities cope with various economic woes, the Ag Department and others in the Bush administration, including some White House contacts, have tried to douse growing anger about what some in the agribusiness industry -- including livestock producers -- feel is an equity focus problem favoring corn-based ethanol.

USDA spokesman Keith Williams made it clear that the Business and Industry (B&I) program is "not a bailout" program, and that USDA guarantees eligible loans, and makes no direct loans.

Note: Link to USDA information regarding the B&I program.

Here is how Williams answered several questions I posed to him regarding the hot topic:

-- What is the actual funding for the B&I program?

Williams stressed that "this is not the money loaned out; the banks do that."

Budget authority is $15.6 million – to provide backing for $362 million in loans, Williams detailed.

"Remember that we do not guarantee 100 percent of the bank’s loan," Williams said, "we guarantee 60 percent of the loan a bank makes for $10 million to the $25 million limit. For loans of $5 to 10 million, we guarantee 70 percent. For loans of $5 million or less, the maximum guarantee is 80 percent."

-- In the life of the B&I program, I vaguely recall there were some defaults on the program in the late-1970s, early 1980s regarding gasohol facilities. Is this correct? If so how much?

Williams: "Correct, they were the old gasohol technology – without the support or development that ethanol or cellulosic (has become today). {It was a) different directive by Congress 20 to 30 years ago when the technology and market was not developed, there were defaults.

"There have been no defaults since that time. We have the following requirements now that weren’t in place then:

-- "The program does not guarantee marginal or substandard loans, nor provide relief to lenders that have such loans.

-- "The lender is primarily responsible for determining credit quality and must address all of the elements of credit quality in a written credit analysis. The Agency in particular will review the borrower’s cash flow, collateral, equity, and management, and also the status of its industry. Financial statements, insurance, appraisals, business plans, and feasibility studies will also be considered."

-- What is the percentage of B&I loan guarantees relative to refinancing and new projects?

Williams: "Of just ethanol projects -- I have actual numbers, since the numbers are so low, percentages wouldn’t be as precise as the hard numbers:

"One is a refinance done in 1998.

"Since the beginning of the program, there have been 31 loans for new businesses. Of the 31 new business guarantees, the last 2 years (2007 and 2008), there were 13 loans to businesses.

"In the history of the B&I program, there have been a total of 48 ethanol plant guarantee loans (that includes the 31 new businesses, the one refinance, with the balance being for equipment, working capital, etc)."

-- Are Schafer's comments any signal of a new direction for the program?

Williams: "Ed Schafer answered a question posed about rural businesses – he answered with the example of the 35-year old B&I Loan Guarantee Program available to rural businesses. Its requirements for rural businesses remain the same. The program is not targeted to ethanol nor any other specific business."

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.