February 16, 2009

Aventine Renewable Energy Inc. (AVR) may be unable to make an interest payment due this spring, setting up a possible faceoff with creditors, according to industry analysts and companies that do business with the ethanol producer.

 

High corn prices and low demand for the corn-based fuel cut into the profits of ethanol producers like Aventine in 2008, forcing some rivals to seek bankruptcy protection. VeraSun Energy Corp. (VSUNQ), the largest publicly traded independent ethanol producer, filed for Chapter 11 protection in October and other smaller companies have followed suit.

 

Aventine's Chief Financial Officer, Ajay Sabherwal, declined to comment Thursday, saying the company is no longer speaking to the press.

 

Pekin, Ill.-based Aventine made bets that corn prices would continue to be relatively high after the commodity swung to its peak this summer. During the second half of 2008, corn prices plummeted, and companies that had locked in corn contracts early in the year were stuck paying prices above market levels. Aventine purchased nearly half of its corn at prices that were more than US$1.25 above the average price of corn for November and December.

 

This corn-purchasing strategy, coupled with payments for new plants, may have depleted Aventine's cash reserves and available financing, said several analysts who follow the company. It's very difficult for ethanol companies to obtain additional funding or to renegotiate contract agreements. It's unclear whether Aventine has sought concessions from lenders or suppliers.

 

"It would be head in the sand not to acknowledge that the entire industry is in tough shape," said Joseph Gomes, an analyst with Oppenheimer & Co. "If there's not some kind of relief in terms of these guys making money, it will be tough for any one of them to continue to operate under the existing conditions."

 

Some relief is on the horizon as producers face financial difficulties and cut production, reducing oversupply, Gomes said. Demand may also be stimulated as the Obama administration considers measures to increase the number of gallons of ethanol that must be blended with gasoline. However, these changes may not come soon enough to relieve any pressure on Aventine.

 

Aventine has a US$15 million interest payment due on its bonds on April 1.

     

"Making this interest payment could be quite a challenge for them," said Ian Horowitz, an analyst with Soleil Securities Group, a research firm in New York.

 

Ratings agencies have cautioned that Aventine may be unable to make the payment. Moody's Investor Services downgraded Aventine's senior unsecured notes by two levels last month to just one notch above default.

 

Aventine has not yet scheduled its fourth-quarter earnings release. The company ended the third quarter with US$36 million of cash on hand and access to a US$132.9 million revolving credit facility.

 

"It would be foolish for me to say that we're not concerned about debt," said an ethanol producer who pays Aventine to market its fuel. Two other producers that use Aventine's marketing services said that they were worried that Aventine could file for bankruptcy protection. Both expressed concern that they would be unsecured lenders if Aventine filed for bankruptcy and would lose the money they have paid Aventine for ethanol marketing for the next two months.

 

Three ethanol producers stopped using Aventine's marketing services in the third quarter, cutting the company's profits from its marketing network.

 

Some of Aventine's available cash and credit may have been used to fund construction of two proposed ethanol facilities in Aurora, Neb., and Mt. Vernon, Ind. While work on the two plants has been halted, Aventine still is required to make payments to its construction contractor for suspending the contract and for early construction costs that were incurred, according to Moody's.