Over the past year, ethanol industry fundamentals have improved dramatically, but it is uncertain whether this progress can be sustained, according to a report published today by Standard & Poor's Ratings Services titled "Ethanol Is Hot, But That Doesn't Ensure Stronger Ratings For U.S. Producers."
The U.S. ethanol industry is benefiting from increasing political support and ever-rising demand as gasoline prices soar along with those of oil. Also boosting the ethanol makers is the 51 cents-per-gallon tax credit granted to blenders and the need to rapidly replace the phased-out gasoline additive MTBE."Against this backdrop, we continue to analyze the credit quality of ethanol producers with our conservative assumptions and to continue to highlight fundamental risks that face industry players," said Standard & Poor's credit analyst Elif Acar.
The profitable ethanol market has resulted in rising capital costs and longer time to market -- factors that can in some cases more than offset the benefits of higher ethanol prices or new production facilities.
"As a result, we conclude that most projects and companies in the ethanol industry seeking ratings for long-term financing would continue to fall into the highly speculative-grade 'B' category," Acar said.
However, projects that have a low level of debt leverage compared with peers, adequate liquidity and existing capacity that is poised to take advantage of the current high-ethanol/low-corn-price environment with locked-in margins providing some cash flow certainty, may achieve higher ratings if the debt structure allows for meaningful debt repayment during such stronger periods.