This article by Morgan Watkins was first published in the Louisville Courier Journal on February 15, 2019.
To help pay for the construction of a highly anticipated aluminum rolling mill in Eastern Kentucky, Braidy Industries is asking to borrow up to $800 million from a federal program that hasn’t issued a new loan in almost eight years.
The U.S. Department of Energy’s Advanced Technology Vehicles Manufacturing direct loan program lends money to eligible businesses that make certain kinds of fuel-efficient cars or components for such vehicles.
It gave out its first loan in 2009 to Ford Motor Co., which used some of the money to retool its assembly plant in Louisville.
Since then, only four other businesses — including automakers Nissan and Tesla — have received financing from the ATVM program. The two other businesses eventually shut down without repaying millions in taxpayer money they borrowed.
The program did provide a conditional commitment for a new loan in 2015, but the recipient turned the money down.
President Donald Trump’s administration has suggested eliminating the initiative.
The Department of Energy’s budget requests for fiscal years 2018 and 2019 proposed axing the program. The administration’s 2018 budget blueprint, which also called for cutting other Department of Energy initiatives, said, “the private sector is better positioned … to commercialize innovative technologies.”
A May 2018 Roll Call article quoted U.S. Sen. Lisa Murkowski of Alaska, who chairs the Senate Energy and Natural Resources Committee, saying she didn’t have a problem with rescinding it. “… You’ve got a program that hasn’t done anything for seven years now. So for me, that makes sense,” she said.
The nonpartisan, nonprofit organization Taxpayers for Common Sense has stated that ending the program, as Trump’s administration recommended, would be the right move.
“It’s putting taxpayers at too great a risk, and right now we’re already in really tight budget times,” said Autumn Hanna, vice president of Taxpayers for Common Sense.
Braidy has applied to borrow up to $800 million through the ATVM program as it works to amass enough financing to build a $1.7 billion mill that is slated to supply automakers with lightweight sheet aluminum and help revitalize the economy in a jobs-starved corner of Kentucky.
Braidy’s promise to create more than 500 well-paid, long-term jobs near Ashland — where longtime employer AK Steel plans to close its manufacturing plant this year — prompted the state government to invest $15 million in the venture in 2017.
State data for December 2018 show a preliminary unemployment rate of 5.2 percent for Boyd County, where Ashland is located, while the surrounding Greenup, Carter and Lawrence counties respectively had unemployment rates of 5.9 percent, 7.8 percent and 6.4 percent.
All exceed the national rate of 4 percent for January 2019.
Braidy broke ground on the future mill in June 2018 and plans to start full operation in 2021. But the company’s plan to build the mill hinges largely on its ability to fund the massive construction project with a mix of equity and debt.
Whether its loan request will be granted by the federal government remains a question. The Department of Energy has denied ATVM applications in the past, according to news reports, and a 2013 U.S. Government Accountability Office report said there were seven ATVM applications at that time that were considered “inactive for reasons including insufficient equity or technology that is not ready.”
Braidy has received a “letter of substantial completion” from the Department of Energy for its ATVM loan application, according to CEO and founder Craig Bouchard.
“They told us that in seven years we are the greatest applicant that they have met, and they’ve been working very closely with us,” Bouchard said of the ATVM program in September 2018, when his company launched a major stock sale.
But determining an application is substantially complete is only the first step in the loan review process, according to information available on the Department of Energy’s website. The next phases involve financial and technical assessments, evaluation of a project’s eligibility and extensive due diligence appraisals.
The ATVM program offers long-term, low-interest loans, but it isn’t Braidy’s only option.
The company is in talks with unidentified “global financial institutions,” although documents filed with the U.S. Securities and Exchange Commission in January said none of them had committed to finance the mill’s construction yet.
It also may request up to $360 million in export credit support from Germany’s government for mill equipment costs, according to January SEC filings.
If it doesn’t get debt financing through the U.S. or German governments, Braidy will have to seek support from other sources “at substantially higher cost,” those SEC filings stated.
Steven Orpurt, an Arizona State University accounting professor, said Braidy should absolutely keep exploring the Department of Energy loan opportunity and evaluating if it’s the best financing option.
Applying for it indicates they’ve done their due diligence in identifying possible funding sources, he said, because businesses generally are more likely to get better terms on a loan from the government than in the marketplace.
“To me, it’s a signal that they seem to be on top of things,” he said.
Braidy declined to answer specific questions the Courier Journal submitted in late January about the ATVM program, including whether it has an estimate for when the federal government may decide on its application, and cited SEC requirements as a reason for doing so.
A company representative referred the Courier Journal to prior company statements and public disclosures for information.
The U.S. Department of Energy also declined comment, noting in an email that loan applicants and the application process are considered business-sensitive information.
The Courier Journal reported this story by reviewing publicly available government documents and news articles about the ATVM program and through various interviews.
The ATVM program got rolling when the nation was still in the grips of the Great Recession and federal fuel economy standards were getting stricter.
From 2009-11, the program issued loans to five companies. The largest went to two giants of the automotive industry: Ford, which got $5.9 billion, and Nissan, which borrowed $1.45 billion.
The other three went to newer companies: Tesla, which received $465 million; Fisker Automotive, which was approved for $529 million but only drew down about $192 million before it ran into trouble; and The Vehicle Production Group LLC, which got $50 million.
Nissan and Tesla collectively created more than 2,800 jobs at the facilities supported by the ATVM loans they received, according to the Department of Energy’s website. And Ford “created and preserved” 33,000-plus jobs at its ATVM-supported operations in Kentucky and other states.
But Fisker Automotive and The Vehicle Production Group ultimately defaulted on their loans, costing taxpayers about $180 million.
Since those defaults, the ATVM program hasn’t issued another loan, according to an online portfolio of the Department of Energy’s loans and loan guarantees that was up-to-date as of December 2018 and a review of recent agency news releases.
It has, however, shown interest in financing businesses that make aluminum sheet for automakers, as Braidy plans to do.
In 2015, the Department of Energy provided a conditional commitment to make a $259 million loan to an aluminum-centered firm called Alcoa.
Alcoa later split into two separate entities, and Arconic — the company that kept running the aluminum sheet operation — opted against taking the ATVM loan, Reuters reported in 2017.
Hanna, of Taxpayers for Common Sense, said her organization hopes the Department of Energy has been slowing down the lending pace of the ATVM program because it recognizes the pitfalls involved, such as the agency’s inability to provide sufficient oversight. Projects should seek support in the private marketplace instead.
“Financing out of DOE has a history of problems,” Hanna said. “(Regardless) of the project, we know that the way the program is set up, it’s too risky for taxpayers.”
Federal losses from loans to Fisker Automotive and The Vehicle Production Group happened after the collapse of Solyndra, a California-based solar panel business that got a loan guarantee through another Department of Energy program but went bankrupt.
A 2015 investigative report by the department’s inspector general’s office determined taxpayers were likely to lose more than $500 million in the Solyndra deal.
President Barack Obama’s administration received fierce criticism over the deal, including allegations that political connections played an inappropriate role in the Department of Energy’s financing decisions.
The subsequent slowdown in issuing loans (and loan guarantees) may have been related to flame-outs such as Solyndra, but other factors also appear to have been involved, including waning interest among businesses.
U.S. Government Accountability Office reports in 2013 and 2014 said applicants and manufacturers indicated the costs of participating outweighed the benefits.
They cited concerns over the “burdensome application and review processes” and noted that public problems such as the Solyndra situation at the Department of Energy had tarnished the ATVM program, “which may have led to a deficit of applicants.”
“I think what’s happened is there just haven’t been that many potential users of it,” said U.S. Rep. John Yarmuth, a Louisville Democrat who was an early proponent of the initiative in Congress. “It’s not that the program was a bad program.”
Despite financial losses the federal government suffered from defaults such as Solyndra and Fisker Automotive, the Department of Energy’s overall portfolio for the ATVM program and other loan-related initiatives has been successful, said economist Nick Loris of The Heritage Foundation, a conservative, nonprofit public policy think tank.
However, he suggested such success is an indication that a lot of the companies that received financing would have been able to attract non-governmental support.
It isn’t easy to get big projects funded, but economically valuable ideas will succeed in getting financing from the private sector, he said.
“Ultimately, I would characterize the program as unnecessary,” he said. “To me, it does strike me as a clear example of corporate welfare when you’re giving money to companies like Ford and Nissan.”
He’s also concerned that governments essentially “put a thumb on the scale” when they loan money to companies, which benefits successful applicants but can hurt other businesses.
Federal support could help attract private investments that otherwise might have gone to different ventures, which may not be getting government subsidies, Loris said. Fisker Automotive, for instance, attracted $1.1 billion in private financing before it went bankrupt, but much of that money flowed in after it was approved for an ATVM loan.
“I do think that it does funnel private investment in certain directions because when the government gets involved, it changes the risk calculation for a number of investors,” he said.
The ATVM program has its defenders.
Congress didn’t cut it from the Department of Energy’s budget this fiscal year, and the Energy Futures Initiative published a report in March 2018 that said the Department of Energy’s portfolio for certain loan-related programs, including the ATVM initiative, had an overall default rate of just over 2 percent and could still be leveraged in beneficial ways.
Yarmuth, chairman of the House Budget Committee, praised the impact the program had on Kentuckians through the loan to Ford.
He acknowledged, however, that politics always comes into play when federal dollars are up for grabs — a criticism sometimes lobbed at the Department of Energy.
The Department of Energy considers various factors when determining whether to approve an ATVM loan, and Yarmuth noted that he expects the government would want to see a “substantial level of private investment” before it authorizes any financing.
Applicants must be “financially viable without the receipt of additional federal funding” associated with the proposed project, according to documents available on the Department of Energy’s website. A key point of evaluation is whether there’s a reasonable prospect that a business will be able to make its loan payments.
Before it can secure enough debt financing from prospective lenders to fund the mill’s construction, January SEC filings for Braidy said the company expects it must raise about $500 million in additional equity capital.
The deadline for Braidy’s current $500 million stock sale has been extended twice and now is set to end March 31, as talks with potential investors continue.
Whether Trump’s administration, which proposed gutting the ATVM program, wants to green-light new loans also could be a key factor in the outcome of Braidy’s application.
Dan Reicher, a Stanford University lecturer and former assistant secretary of energy under President Bill Clinton who also advised one of Obama’s energy secretaries, noted that the Trump administration has pushed back against Obama-era fuel economy standards and is working to adopt less stringent requirements.
Reicher said he has seen “a reluctance on the part of the White House, particularly the Office of Management and Budget,” to issue new loans.
However, he believes Department of Energy officials may want to kick the agency’s Loan Programs Office, which oversees loans and loan guarantees made through the ATVM program and other initiatives, back into a higher gear.
In summer 2018, the department called for applications to its Tribal Energy Loan Guarantee Program, which is designed to support energy development projects in Alaska Native and Native American communities.
“I do think there is some interest at the Department of Energy to start making loans again,” Reicher said. “There’s a very talented staff of people there. They’ve done a good job of overseeing the loans that have already been made, and I think they’d love to be back in business.”
Reicher said he still sees value in the ATVM program, which provided crucial support to Tesla in the venture’s early days.
“We’re sort of tying our hands when it comes to international automobile competition by not providing the sort of help that the loan program is designed to make available,” he said.