November 4, 2008 / 5:24 AM / 9 years ago

RPT-UPDATE 3-Judge approves VeraSun's rare bankruptcy financing

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By Emily Chasan

NEW YORK, Nov 3 (Reuters) - A U.S. judge on Monday approved ethanol maker VeraSun Energy Corp's VSE.NVSUNQ.PK use of a rare bankruptcy financing maneuver to obtain $220 million in funds from two groups of existing lenders so it can operate during its reorganization.

In court documents filed Monday, the company said it could not find financing any other way and asked a judge to approve the maneuver, known as "priming," which offers extra protections for the existing lenders.

VeraSun said in court documents that if it was not approved it would have to liquidate, giving lenders an incentive to provide the funding.

U.S. Bankruptcy Judge Brendan Shannon approved the interim financing arrangements at an emergency hearing Monday in Delaware, according to court papers.

The company said it recieved commitments for up to $215 million in debtor in possession (DIP) financing from some lenders and senior secured notes' holders.

The ethanol maker also said the court approved the borrowing of up to $40 million from those facilities, which will help it to continue operations.

VeraSun is the largest publicly traded U.S. ethanol producer, consuming about 5 percnt of the corn grown annually in the United States, according to court documents.

The South Dakota-based ethanol maker and 24 affiliates filed for bankruptcy protection on Friday, citing a severe liquidity crisis as fluctuations in the price of corn, natural gas and ethanol have hurt its ability to make debt payments, and it was unable to raise additional capital from the markets.

Dipping Into Lenders

The company worked over the weekend to arrange financing as earlier discussions to arrange typical bankruptcy financing fell apart last week, according to court documents.

But VeraSun said it could not get financing in the form of unsecured credit or unsecured debt with administrative priority -- the typical funding during bankruptcy.

VeraSun said it was seeking court approval for its secured noteholders to provide up to $25 million in interim DIP financing, and up to $190 million in final DIP financing, according to the documents. It is also seeking approval for up to $17 million in interim DIP financing and up to $30 million in final DIP financing.

The agreements to "prime" existing lenders were consensual, VeraSun said. Without approval to receive the funds, the company said it would be forced to discontinue operations and shut down.

In the last few months, the credit crisis has pushed lenders away from DIP financing, forcing bankrupt companies to go to existing lenders for loans, according to industry experts.

Often, existing lenders will provide an unsecured DIP facility, but VeraSun had to go even further, offering more protections to secured lenders to get funding.

"It is fairly unusual, although we may be seeing more of it in the current situation that we're in," said Stephen Lubben, a bankruptcy professor at Seton Hall Law School in New Jersey. "Firms are going to be desperate to find financing. In the past you would try to avoid this."

In order to get the financing, VeraSun said it will offer protection to its lenders in the form of additional liens to avoid hurting the value of the lenders' pre-bankruptcy collateral.

VeraSun's 9.875 percent notes due in 2012 last traded at about 41 cents on the dollar, yielding 40 percent, while its 9.375 percent notes due in 2017 traded at about 7.5 cents on the dollar on Friday, according to Thomson Reuters data.

Its stock, which has been delisted from the New York Stock Exchange, fell 3 cents to 20 cents in Pink Sheets trading on Monday. (Reporting by Emily Chasan, Additional Reporting by Ajay Kamalakaran in Bangalore, editing by Gerald E. McCormick/Jeffrey Benkoe)

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