Making the Deal

Photo: St. Louis Business Journal

Attend any industry conference, and you come away thinking the same thing: The biggest obstacle to commercialization of waste-to-energy and biofuels technologies is financing. John May is trying to do something about it.

As managing director at investment bank Stern Bros. & Co., St. Louis, he’s been fighting what many insiders see as a one-man battle to raise project financing for biomass and waste to energy (WTE) for more than 10 years.

May comes across as charismatic and competent when discussing the waste-to-energy and biofuels sector. He is considered the lead banker on more large U.S. waste-to-fuels projects than anyone else, totaling nearly $1 billion in debt financing for international biodevelopers to be closed over the next two years. Most of these are first commercial-scale projects.

May says an attorney friend jokingly introduced him at a recent conference panel as “the god of biomass finance.” Some developers have called him “the last banker.”

Taking Risks
Trained as a lawyer and banker, and with an Ivy League education (he graduated in 1980), he is ironically a huge risk taker. By his own admission, he was unsuccessful in the large firms. “I could never seem to make it in those environments,” he admits. He had problems with bosses and was not a rule follower. In today’s parlance, he could be described charitably as entrepreneurial.

“It got to the point where I had to do something no one else was doing,” he says. It was only when he landed at the boutique Stern Bros. that he says things started to happen for him. Fast-forward to today, and he’s been largely responsible for turning Stern into one of the most recognized finance brands in the biomass and WTE industry.

“He took long chances, and several big, innovative deals got done,” says the CEO of one of the well-known biorefinery companies May represents.

The biggest risk May took was introducing a series of bio and WTE projects to the high-yield bond market, in search of nonrecourse debt unavailable from commercial banks. (May and his associates wrote about this in a two-part series published in Renewable Energy from Waste magazine last year.)

He is credited with pioneering the broader use of tax-exempt bonds for renewable projects during the last decade. According to May, that’s really where his influence in the industry started to develop. “Bio and waste-to-energy were the only segments that weren’t receiving bank loans or tax equity,” he observes. “Bonds were the only debt market with the liquidity and risk appetite to consider these asset classes.”
 

Pivotal Moment
It was his work with the U.S. Department of Agriculture (USDA) beginning in 2010 that brought him coverage from the trade press and frequent speaking slots on the international circuit. When, at his suggestion, the agency changed the rules governing its underutilized loan guaranty programs to back bonds, rather than limiting them to bank loans, “It shot me out of a cannon,” May says.

Attending a Vilsack press conference in Washington, D.C., in 2010, May says he stood up and asked the first question about whether the loan guaranty programs could be changed to focus on the bond market. Everyone in the audience applauded before Vilsack could respond. Months later, after detailed briefs submitted by Stern and two law firms, May says a new rule was issued by the agency.

Over the next two years, May and his team won loan guarantees for seven different projects for international biofuels companies, several of which use waste as a feedstock. One was for Ineos Bio, which became the first commercial-scale, waste-to-cellulosic-ethanol facility in late 2011. May closed the first project financing for a biochemical plant for Myriant Corp. in June of 2012. Biofuels Digest called Myriant the “Deal of the Year.” The transaction also was a finalist for Deal of the Year at the 2013 World Biofuels Markets Conference in Rotterdam, the Netherlands.

In the waste-to-power, gas and combined-heat-and-power (CHP) sectors, May’s group has financed landfill-gas-to-electricity projects and currently represents a number of developers seeking to deploy gasification and pyrolysis technologies. Progress has been slow, according to May. As the major problems, he cites a lack of equity from entrepreneurs and strategics, independent engineer disagreements over the efficacy of various proprietary technologies, high capital costs in relation to electricity and gas prices in some cases and small projects tied to risk-averse governmental entities.

“The fact that there are over 500 different WTE companies seeking commercial financing around the world doesn’t help in convincing debt and equity funds to invest,” May points out.

Nevertheless, May and his colleagues, who have 15 offices in the U.S., are still looking for the best projects to help finance and still looking to innovate, whether in the U.S. or offshore.

May also is pursuing the creation of technology risk insurance policies for these WTE and biomass technologies from major third-party insurers who have already issued such policies in the wind and solar spaces.

Another of May’s near-term objectives is the crafting of customized, realistic credit criteria for biomass and WTE projects from national rating agencies such as Fitch and Moody’s. “The fixed income market is looking for higher yields (interest rates) and, thus, must accept more risk,” May says. “Our industry has to stop apologizing for feedstock risk, mitigate it as best we can, and get deals financed.”

To derisk technology and feedstock, he advocates the expansion of traditional export-import bank loan guarantees to enhance bonds sold in the U.S. and overseas markets.

In the end, “the last banker” comes off as a bit preachy in conversations and speeches, but he won’t equivocate. “The industry and the markets could use a bit of evangelizing to get capital flowing,” says May. “Waste to energy could be the biggest sector within renewables, but we have to be willing to risk a lot to get it there.”

The article was submitted by Stern Bros., St. Louis. More information is available at www.sternbrothers.com.