It is not as easy to walk away from a loan that was guaranteed by the federal government. Last week Solyndra, a California-based, solar panel manufacturer, shuttered its plant and laid off more than 1,000 workers as a result of losing its business to Chinese competitors. This week it is facing the wrath of the government, and more ire is sure to follow.
Despite what many believe, Solyndra is not the first energy company to have filed for bankruptcy after securing federal loan guarantees. In 1985, Wabash Valley Power Association, a not-for-profit cooperative utility, filed for bankruptcy after it secured an approximate $948 million loan guarantee from the federal Rural Electrification Administration (REA). Wabash Valley owned 17% of the failed Marble Hill nuclear power plant.
In January of 1984, Public Service Indiana, now a unit of Duke Energy (DUK), canceled construction of Marble Hill because of sizable cost overruns. In the same year, Wabash Valley was forced to file for protection from its creditors under Chapter 11 of the federal bankruptcy code.
At the time of filing, Wabash Valley had outstanding debts to the REA totaling $671 million. After years of threats, litigation, appeals and much pain, the REA ended up absorbing losses.
To be clear, the REA did not loan Wabash Valley money; it simply guaranteed loans up to a specified limit so that Wabash Valley could secure debt from commercial banks at the lowest possible cost. Such is the case with Solyndra, which was able to use federal guarantees to approach the debt markets and secure very low-cost debt. Typically, interest rates are near treasuries for these types of loans.
When a company with federal loan guarantees files bankruptcy, the actual debt holders walk away with all their money unharmed. Debt holders are third parties and have first rights on the company's assets. But in this instance, the federal government guaranteed their principal and interest.
On the other side of the ledger, equity holders usually lose everything in bankruptcy, and such is the case with Solyndra. According to The Washington Post, Solyndra's primary investors were the George Kaiser Family Foundation and the investment firm, Argonaut Private Equity.
Of course, Solyndra's owners and the federal government were not the only losers in Solyndra's bankruptcy. Solyndra's management team, the employees, the community and the American public lost everything.
Further, it is not clear how much the federal government actually lost. In order to get the loan guarantee, Solyndra paid hefty "loan application" fees to the federal government. In addition, the federal government has the option of liquidating Solyndra's assets in order to further reduce its losses.
In all likelihood, the federal government will not limit its collection process to the traditional bankruptcy process. If Wabash Valley is any indication, the federal government will use all resources possible to recover any losses, including pressuring the owners and executives with threats of criminal charges. As of this writing, news outlets are reporting that the Federal Bureau of Investigation is already involved. This is just the beginning.
But another loser may be the nuclear power industry. In order to build a new nuclear power plant, federal and state assistance is essential. Several nuclear utilities have already applied to the U.S. Department of Energy (DOE) for similar federal loan guarantees. The Southern Company (SO) already received a conditional loan guarantee and Constellation Energy Group (CEG), NRG Energy (NRG) and other nuclear utilities are waiting to hear if their applications will be approved.
The Washington Post is reporting that Republicans are beginning line up to criticize the Obama Administration's handling of Solyndra's loan guarantee. They may want to proceed with caution, as that criticism could backfire and kill any hope for their cherished nuclear renaissance.