Sep 22

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$535 million U.S. Loan to Solyndra was predicted to be a failure

Solyndra was a manufacture of solar cells based in Freemont California. In August & September 2011, Solyndra ceased all business activity, filed for Chapter 11 bankruptcy, and laid off all employees. The federal government is Solyndra’s largest creditor, having made the company a $535 million loan guarantee.

The interesting thing about this loan is not that a mistake was made. It was how the mistake was made.  Solyndra’s investors made substantial donations to the Obama campaign, with additional large amounts spent on lobbying.  The financial analysts who were analyzing the loan stated that the government loan should not be made, but this analysis was overridden.

The information quoted below regarding the Solyndra loan analysis comes from emails and documents obtained by Congress, and which are hosted on a congressional website.  Surprisingly, these records have not gotten the attention that they deserve.  Perhaps this is occurring because this information is lost in too much detail and volume. The rest of this blog entry provides details contained in the documents that Congress obtained.

The loan guarantee was denied by the Bush administration. A memo summarizes this decision, which includes:

 On January 9, 2009, the Credit Committee convened to consider the referenced project for a loan guarantee of $535,000,000 under Title XVII of the energy Policy Act of 2006. On January 9, following a presentation to the Credit Committee and further deliberations of its members, the committee reached the following conclusions:

The apparent haste in recommending the project meant that certain LPGO [Loan Guarantee Program Office] procedures were not adhered to. …

There is presently not an independent market study addressing long-term prospects for this specific company beyond the sales agreement already in place. Since the independent credit assessment raised the issue of obsolescence in marketing this project, it is important to have an independent analysis of that issue as well as the current state of the competitive market. …

There is concern regarding the scale-up of production assumed in the plan for Fab 2.”

On January 13, 2009, an email from Lachlan Seward (Director of the U.S. Department of Energy loan program to encourage production of electric cars, and an experienced finance professional) wrote a confirming email that stated:

 After canvassing the committee it was the unanimous decision not to engage in further discussions with Solyndra at this time.”

A week later, on January 20, 2009, President Obama was inaugurated.  Less than a week into the Obama administration, on January 26, an email re: “Solyndra Analysis” makes it clear that the Solyndra loan is back on approval mode.  The email states,

As we are approaching the beginning of the approval process for Solyndra again … Delay in getting these responses will delay our ability to review the project and to meet the target deadline we have set.

As an additional note, I want to ensure that these concerns are addressed in the negotiations occurring Friday with Solyndra.  As a practical matter, it would be ackward (sic) to finalize the negotiations with the applicant and then go back to them with additional requests for information.”

The U.S. Department of Energy offered Solyndra a $535 million loan guarantee on March 20, 2009. In May 2009, Solyndra was personally promoted by President Obama in his visit to the company. His comments there included:

The true engine of economic growth will always be companies like Solyndra, will always be America’s businesses. But that doesn’t mean the government can just sit on the sidelines. Government still has the responsibility to help create the conditions in which students can gain an education so they can work at Solyndra, and entrepreneurs can get financing so they can start a company, and new industries can take hold. …

And we can see the positive impacts right here at Solyndra.  Less than a year ago, we were standing on what was an empty lot. But through the Recovery Act, this company received a loan to expand its operations. This new factory is the result of those loans.”

But, after the loan guarantee was already made and the President made his speech praising the guarantee, the analysis of the appropriateness of the loan guarantee was still open. An August 20, 2009 email regarding “Solyndra: Responses to Credit Analysis Questions” included the following assessment:

 The issue of Working Capital remains unresolved. First, it seems clear that the cost overrun equity commitment would support cost overruns and ineligible project costs. However, the issue is cash balances, not cost. [Redacted name] seems to agree that the model runs out of cash in September 2011 even in the base case without any stress. This is a liquidity issue. Secondly, given the implications above, it is difficult to assume in a default scenario that any other entity would be able to assume management of the project company without any working capital. As a practical matter, feasible and leads to questions of ability to run the project company as a stand alone entity. Finally, how can we advance a project that hasn’t funded working capital requirements and that generates a working capital shortfall of $50 million when working capital assumptions are entered into the model? This is a serious issue we need to resolve as a credit matter. It also simply won’t stand up to review by oversight bodies.”

Solyndra’s 2009 revenues were approximately $100 million. 2010 revenues were approximately $200 million. With large loans incurring interest, an expensive facility, and planned production costs for the units being sold, there is no way that Solyndra could have been profitable.  Not shockingly, it was not.

Solyndra ran out of cash (filing bankruptcy and going completely out of business) when predicted by the August 2009 memo quoted above. This was not a situation of bad luck or mistaken judgment. Instead, Solyndra was a rush to make a taxpayer loan that everyone who was looking knew would be bad.


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