Panda Ethanol Inc. (OTC Bulletin Board: PDAE) yesterday announced that its Hereford Biofuels subsidiary has filed a voluntary petition for relief under Chapter 11 in the U.S. Bankruptcy Court for the Northern District of Texas.
The company intends to sell its major asset, the Hereford ethanol refinery, pursuant to a Section 363 sale process approved by the bankruptcy court. The bankruptcy filing does not include Panda Ethanol, the parent company of the Hereford subsidiary.
Panda Ethanol said in a release the bankruptcy decision was precipitated by the refusal of one of the project’s leading banks to fund its loans, which the company believes is a breach of the bank’s financial commitment.
Although the ethanol refinery is in the late stages of construction, on December 31, Panda Ethanol said it was notified by Societe Generale, the administrative agent for the Hereford subsidiary’s lending syndicate, that one of the major syndicate banks had informed Societe Generale that it would not fund its share of further borrowing requests for the project.
After repeated conversations with the syndicate and an unsuccessful attempt to secure debtor-in-possession financing, the Hereford subsidiary’s management concluded that the only prudent option available was to put the facility up for sale through a Section 363 sale process.
"Over the past many months, we have worked diligently to successfully overcome a number of challenges," said Darol Lindloff, CEO of Panda Ethanol, "including continued construction delays; the termination of the general contractor, Lurgi, for cause; and the assumption of responsibilities for managing the remaining construction at the site. We retired a $1.6 million loan, successfully negotiated the granting of waivers that would extend construction deadlines to February 28, and obtained $2.5 million in new working capital. We also restructured the funding arrangements for the Hereford subsidiary–during a very difficult time in the capital markets–that would allow us to make borrowings of up to $31.5 million to complete construction and bring this facility on line. More recently, we have been working to correct Lurgi design errors for certain pipes and valves at the refinery. But, when faced with insufficient funding to complete and operate the project, we were effectively presented with only one choice–to seek the protection of the courts and put the Hereford facility up for sale."
The Hereford subsidiary is currently in negotiations with a potential buyer, the company said. Pursuant to Section 363 of the Bankruptcy Code, other companies will have an opportunity to submit bids for the facility under a court-supervised process. The company expects for a sale to close within 60 to 90 days.
In the interim, the Hereford subsidiary intends to seek approval from the bankruptcy court to draw upon and use existing cash collateral to fund ongoing operations.
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