The Energy Department's response

The Energy Department's response to questions from iWatch News and ABC News:

Why is the rate for Solyndra, listed at 1.025% for this quarter, lower than other Energy Department loans? This report cites 18 Energy loans: In some cases, other Energy loans carry rates three to four times higher than Solyndra's. Why is that?

All borrowers under the 1705 program receive the same treatment under the FFB lending policy, and are afforded the same rates for a given loan duration.  For example, if multiple borrowers request a loan with a duration of 3 years, they will all be afforded the same rate. FFB interest rates are set by FFB using a formula and are based on the market pricing of similar maturity U.S. Treasury securities as of the day of loan disbursement.  As a general rule, shorter-term loans tend to have lower interest rates (because shorter-term Treasury securities tend to have lower yields).  And, as you are probably aware, interest rates have been at historic lows recently. So, in other words, Solyndra's FFB loan interest rate is based on the market pricing of comparable maturity Treasury securities on the day that its loan funds were disbursed. The rate listed for Solyndra is lower than other 1705 program loans because the duration of Solyndra's loan is shorter.  You'll note from the chart that the loans with longer maturities are the ones with the higher interest rates. It is also important to note that countries like China are issuing their manufacturers interest free loans. As this chart indicates, 2010 alone the Chinese government gave more than $30 billion in loans to its solar manufacturers.  http://www.greentechmedia.com/articles/read/chart-of-the-day-solyndra-edition/

Solyndra laid off more than 1,100 workers last week and announced it is filing for Chapter 11 bankruptcy protection. Critics say the company's troubles raise significant questions about why the government issued the loan at all - and put taxpayers at risk. How does Treasury respond to these criticisms?

The Department of Energy conducted exhaustive reviews of Solyndra’s technology and business model prior to approving their loan guarantee application.  Sophisticated, professional private investors, who put more than $1 billion of their own money behind Solyndra, came to the same conclusion as the Department: that Solyndra was an extremely promising company with innovative technology and a very good investment. Solyndra met all of its technical milestones and had significant revenue growth, and was called one of the top 50 most innovative companies in the world in 2010 by the MIT Technology Review.   It created 3,000 construction jobs during one of the deepest construction downturns in California history, and allowed the company to expand its workforce to about 1200.

Several analysts have long said Solyndra would have difficulty competing in the global marketplace. To what extent did Treasury weigh such concerns before issuing the $535 million loan in 2009?

We conducted exhaustive reviews of Solyndra’s technology and business model prior to approving their loan guarantee application.  Sophisticated, professional private investors, who put more than $1 billion of their own money behind Solyndra, came to the same conclusion as the Department: that Solyndra was an extremely promising company with innovative technology and a very good investment.    Unfortunately, since that deal was closed, the price of solar cells has fallen more than 70 percent – driven largely by innovations driven by China's investments in their solar manufacturers. Solyndra highlights the broader choice we face as a country: do we want to compete in the global market place – creating American jobs and selling American products in the process – or do we want to buy the technologies of tomorrow from countries like China? This isn’t about picking winners and losers. It’s about choosing to succeed, or choosing to fail.

Reports say that, under Solyndra's refinancing, investors will be paid back before the government. Why is that? How does Treasury respond to criticism of this arrangement?

The court will oversee the sale or liquidation of the assets through the regular bankruptcy process.  Any funds recovered from a sale or liquidation will be distributed based upon legal and contractual standards that determine the order by which creditors will be repaid.  By statute, the Department of Justice represents the United States in front of the bankruptcy court. In late 2010, Solyndra faced a cash flow crisis that is very common for innovative start-up companies that are growing quickly.  The Department reached an agreement with Solyndra that gave the company and its 1100 employees a fighting chance to go forward.  This agreement did the following:

1)      Restructured the debt to give Solyndra more time to repay and avoid default – much like commercial lenders do when a homeowner is having trouble making the mortgage payments.

2)      Ensured that no additional taxpayer funding was used for Solyndra beyond our original loan guarantee.  Solyndra obtained an additional $75 million from its investors, which would only be repaid first in a liquidation, consistent with the typical process for refinancing distressed companies.  After that, $150 million of the U.S. Government’s debt is next in line.  If any additional funds were remaining from the liquidation, the balance of the debt (including $385 million from the Government and $175 million from private investors) would be repaid on a proportional basis.

3)      In exchange for the restructuring, the Department received substantial additional collateral protection in the form of intellectual property, claims on the parent company and more.

4)      Permitted the company to complete, equip and begin operating its plant, which increased its value in any future liquidation or sale.

This restructuring gave Solyndra and its workers the best possible chance to succeed in a very competitive marketplace and put the company in a better position to repay the loan. 

Ultimately, the choice was between imminent liquidation or giving the company and its workers a fighting chance to succeed.  There were risks to both approaches and extensive discussion on how to best assess those risks.  Because the company’s sales were expanding, it was selling its products around the world, and private investors were still prepared to offer additional support, the Administration concluded that the restructuring deal would not only give an innovative company and 1,100 workers a chance to succeed in a very competitive marketplace, but give us the best return on the government’s investment.

As you can see from the attached background document with quotes from independent industry analysts [below], the terms of this restructuring are consistent with standard industry practice in restructuring project finance deals. 

  • Granting seniority to new financing is necessary if a distressed firm is to remain viable during its reorganization. (Bailouts or bail-ins?: responding to financial crises in emerging economies, Nouriel Roubini – professor at NYU’s Stern School of Business and Brad Setser – current member of Council on Foreign Relations)
  • Unless first lien lenders are willing to provide a carve-out for a new DIP lender, securing financing is almost impossible. (http://www.turnaround.org/Publications/Articles.aspx?objectId=13015)
  • “It’s simple. If you don’t have access to capital, you’re not going to survive,” Jones says. (Laura Davis Jones, partner at Pachulski Stang Ziehl & Jones LLP
  • DIP financing is unique from other financing methods in that it usually has priority over existing debt, equity and other claims. (http://www.investopedia.com/terms/d/debtorinpossessionfinancing.asp#axzz1We7zlfqt)
  • One of the factors that makes debtor-in-possession financing attractive for some lenders is that this sort of debt has seniority over any other debt issued by the company. (http://www.wisegeek.com/what-is-debtor-in-possession-financing.htm)
  • Financing is an integral part of a reorganization plan. An effective financing plan will stabilize the company's cash position and provide the needed capital to enable the business to be profitable. Financing also will restructure the balance sheet to support the company in the future. Financing strategies differ depending on the liquidity and viability of the distressed business. The initial task is to maximize liquidity and provide enough time to evaluate viability.
  • Asset based lenders historically have been the primary source of financing for distressed businesses. Lenders often make these loans at premium rates while at the same time requiring an enhanced security position…Debtor in possession loans are made after a company files for bankruptcy protection. To encourage such high risk loans, bankruptcy law grants such lenders a super priority status for repayment. (http://www.strategicmgtpartners.com/library/wcm2.html)
  • DIP financing is unique from other financing methods in that it usually has priority over existing debt, equity and other claims. (http://www.investopedia.com/terms/d/debtorinpossessionfinancing.asp#axzz1We7zlfqt)
  • Debtor-in-possession financing or DIP financing is a special form of financing provided for companies in financial distress or under Chapter 11 bankruptcy process. Usually, this security is more senior than debt, equity, and any other securities issued by a company. It gives a troubled company a new start, albeit under strict conditions. (http://en.wikipedia.org/wiki/Debtor-in-possession_financing)