Pushed by Credit Crunch, Ethanol Producer Declares Bankruptcy

VeraSun Energy Corporation of Sioux Falls, South Dakota, and 24 of its subsidiaries filed for relief under chapter 11 of the U.S. Bankruptcy Code in a Delaware bankruptcy court "to enhance liquidity" while they reorganize.

"Today's filing allows VeraSun to address its short-term liquidity constraints as we navigate historically challenging market conditions while we focus on restructuring to address the company's long-term future," Don Endres CEO said immediately after the filing on Friday. "We appreciate the loyalty of our employees, customers and suppliers during this challenging time."

In the third quarter of this year, the company was hit with a sharp spike in its corn costs, "reflecting in part costs attributable to its corn procurement and hedging arrangements, and historically unfavorable margins," explained Endres.

Beginning in the third quarter, worsening capital market conditions and a tightening of trade credit "resulted in severe constraints on the company's liquidity position," he said.

Opened in Hartley, Iowa in August 2008, the VeraSun Hartley plant is one of the largest greenfield, dry-grind ethanol production facilities in the United States, producing 110 million gallons of ethanol a year. (Photo courtesy VeraSun)

The company expects that it will not scale back its purchases of raw materials, and corn and other suppliers will continue to be paid in full for all goods and services furnished after the filing date as required by the Bankruptcy Code.

Today, during the first day of hearings before Judge Brendan Shannon, VeraSun officials said they had received commitments for up to $215 million in debtor in possession financing from holders of VeraSun's 9 7/8 percent senior secured notes due 2012 and groups of lenders led by AgStar Financial Services.

The Bankruptcy Court entered an interim order allowing VeraSun and its affiliates to borrow up to $40 million from these lenders and authorized the use of cash collateral to enable VeraSun to operate its business.

VeraSun is also in negotiations with its other lenders and expects to receive, when combined with commitments received from the 2012 noteholders and AgStar lenders, aggregate debtor in possession financing commitments totaling $250 million, company officials said.

Judge Shannon also granted VeraSun's emergency request to pay outstanding employee checks, to pay suppliers for postpetition goods and services and up to $20 million for goods delivered on or after October 11, 2008, and for other emergency relief.

The Bankruptcy Court is expected to conduct a hearing Tuesday to rule on the remaining relief requested by VeraSun in its first day motions.

"The financing package approved today allows VeraSun to maintain operations and continue supplying its customers. The relief granted by the Court today will allow us to focus on our operations and, at the same time, provide VeraSun with the liquidity and ability to continue operations, which means producing ethanol and distillers grains, paying suppliers, and satisfying customer needs for product," said Endres.

Founded in 2001, the company has 16 production facilities in eight states, of which one is still under construction.

VeraSun Energy is scheduled to have an annual production capacity of approximately 1.64 billion gallons of ethanol and more than five million tons of distillers grains by the end of 2008.

Distillers grains is a cereal byproduct of the distillation process created by drying mash. It is usually sold as fodder for livestock.

VeraSun also markets E85, a blend of 85 percent ethanol and 15 percent gasoline for use in Flexible Fuel Vehicles, directly to fuel retailers under the brand VE85®.

Copyright Environment News Service (ENS) 2008. All rights reserved.