Pacific Ethanol production subsidiaries file Chapter 11 bankruptcy

By Jennifer Lanning Drey

Portland, Ore., May 18 - Pacific Ethanol, Inc.'s subsidiaries that own its four wholly owned ethanol production facilities filed for Chapter 11 bankruptcy Monday in the U.S. Bankruptcy Court for the District of Delaware, according to a company news release.

The filing subsidiaries included Pacific Ethanol Holding Co., LLC, Pacific Ethanol Madera LLC, Pacific Ethanol Columbia, LLC, Pacific Ethanol Stockton, LLC and Pacific Ethanol Magic Valley, LLC.

Pacific Ethanol and its marketing subsidiaries, Kinergy Marketing LLC and Pacific Ag. Products, LLC, are not part of the bankruptcy filing.

Pacific Ethanol said it expects to continue to manage the operations of the bankrupt subsidiaries under an asset management agreement, and Kinergy and Pacific Ag. are expected to continue to market and sell the plant subsidiaries' ethanol and feed production under existing marketing agreements.

"We have worked well with our creditors to develop a plan that we believe allows us to continue operations and meet our commitments to our customers and vendors," Neil Koehler, Pacific Ethanol's chief executive officer and president, said in the release.

"While the market environment for the ethanol industry has been challenging over the last several quarters, we remain confident that a restructured company will grow and prosper as the demand for low carbon fuels increases."

$20 million DIP loan

The bankrupt plant subsidiaries and existing lenders including WestLB AG have agreed in principal to first-priority secured debtor-in-possession financing of up to $20 million.

Pacific Ethanol is seeking interim access to $10 million of the DIP financing, according to a Monday court filing.

The company said the financing will enable the plant subsidiaries to continue to satisfy customary obligations associated with their operations.

The structure of the financing is such that borrowings are available only to particular operating subsidiaries and not to Pacific Ethanol, Inc. or its other subsidiaries for general corporate purposes.

The DIP facility will also include a roll up amount that will be a 1:50 to 1:00 conversion of an amount not to exceed $30 million.

Interest on the revolving portion of the loan will be Libor plus 10%.

Interest on the DIP roll-up loans will accrue interest at the pre-bankruptcy rate.

The revolving portion of the DIP loan will mature on the earliest of six months after the closing date, the acceleration of obligations under the facility, the first business day on which the interim order expires and a final order has not been entered, conversion of any of the Chapter 11 cases to Chapter 7 unless consented to by the DIP lenders and agent, case dismissal unless consented to by the DIP lenders and agent and the effective date of the company's plan of reorganization.

The DIP roll-up loans may not be required to be repaid in cash on the maturity date.

Forbearance not extended

Pacific Ethanol is in default under its construction-related term loans and working capital lines of credit totaling $246.5 million, as well as under $31.5 million in notes payable to related parties.

The company entered into forbearance agreements with each of the lenders in March, under which the lenders agreed to forbear from exercising their rights until April 30.

The company said the forbearances have not been extended.

Kinergy amends credit facility

Pacific Ethanol also said Monday that its wholly owned subsidiary, Kinergy Marketing, has renegotiated and amended its credit facility with Wachovia Capital Finance Corp. Wachovia has agreed to continue providing up to $10 million for Kinergy's working capital needs.

The term of the credit facility was reduced to a term expiring Oct. 31, 2010 from the previous three years, according to an 8-K filed with the Securities and Exchange Commission.

Under the amendment, Kinergy's monthly unused line fee payable to Wachovia increased to 0.500% from 0.375% of the amount by which the maximum credit under the facility exceeds the average daily principal balance.

The amendment also imposes a new $5,000 monthly servicing fee.

In addition, the amendment limits most payments that may be made by Kinergy to Pacific Ethanol as reimbursement for management and other services provided by Pacific Ethanol to $600,000 in any three-month period and $2.4 million in any 12-month period.

The amendment also revised Kinergy's EBITDA covenants.

The amendment also amended the definition of material adverse effect to exclude the company's subsidiaries' bankruptcy filings from the definition of material adverse effect. However, it further made many events of default that were previously applicable only to Kinergy now applicable to the Pacific Ethanol and its subsidiaries.

It also prohibits Kinergy from incurring additional debt or making any capital expenditures in excess of $100,000 absent the lenders' consent.

Under the amendment, the lender also waived all existing defaults under the line of credit.

The amendment requires that on or before May 31, the lender must receive copies of financing agreements between the company and its subsidiaries and Lyles United, LLC providing for a credit facility of up to $2.5 million over a term of 18 months, the granting by the company to Lyles of a security interest in substantially all of its assets and the use by the company of borrowings thereunder for general corporate and other purposes.

Debt details

According to court documents, Pacific Ethanol estimated its bankrupt plant subsidiaries had assets of between $50 million to $100 million and debt of $100 million to $500 million at the time of the bankruptcy filing.

The largest unsecured creditors include:

• Delta-T Corp., based in Williamsburg, Va., with a $2 million trade debt claim;

• Madera County Tax Collector, based in Madera, Calif., with a $382,146 tax claim;

• Iberdrola Renewables, Inc., located in Portland, Ore., with a $256,840 trade debt claim;

• Novozymes North America, Inc., based in Philadelphia, with a $172,699 trade debt claim; and

• Simplex Grinnell with a $152,237 trade debt claim.

Pacific Ethanol is a Sacramento, Calif., marketer and producer of ethanol. Its Chapter 11 case number is 09-11713.

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