Low-interest funds for EV manufacturers and supply chains
Automobile original equipment manufacturers (OEMs) and suppliers within the electric vehicle (EV) supply chain have a new opportunity to take advantage of low-interest loans to fund technologies that are designed to reduce reliance on fossil fuels.
Established by the U.S. Department of Energy (DOE), the Advanced Technology Vehicle Manufacturing (ATVM) loan program is geared toward promoting the manufacture of EVs and companies within the EV supply chain, which include companies in the lithium-ion battery supply chain and charging networks.
The loans provided under the ATVM program are set at the current treasury rate, leading to significant interest savings compared with traditional lending sources. In addition, the program presents an opportunity for companies to obtain funding when traditional sources of capital may not be available.
An accelerating shift to EVs
The emergence of EVs has changed the auto industry dramatically in the last few years, and experts forecast the shift to intensify in the coming years. Automakers and governments have set ambitious targets for an all-electric future, and large existing automakers and startups announce additional investments into the EV space on an almost daily basis.
Automakers are producing more EVs to meet demand from customers and regulators. Tesla sold nearly 1.3 million vehicles in 2022, growing volumes by 30% over the previous year. GM and Ford have announced plans to have EVs represent about half of new car sales by 2030 and all new vehicles by 2035. The European Union has come to an agreement to move towards a goal that all new vehicles sold in 2035 and beyond will be electric only. California, the state that often sets the regulatory environment, passed legislation for new cars to be all-electric by 2035. Outside of the U.S., similar investments are being made by the major Asian and European automakers. The industry appears committed to the transition from internal combustion engines (ICEs) to EVs, providing opportunities for existing companies and new market entrants.
An opportunity for new entrants and existing suppliers
This transition from ICE vehicles to EVs will create opportunities for new entrants to the auto industry up and down the supply chain. In addition, existing suppliers will need to innovate and retool to keep pace with the technological change and shift in demand related to the transition to EVs. New OEMs have been established based on the EV market, with Tesla being the largest, but several other smaller brands — such as Rivian, Lucid and Polestar — have also entered the market. In addition, demand for new components, such as lithium-ion batteries for the propulsion system, created openings for start-ups. Many existing suppliers are facing dramatic changes in the parts or systems that they manufacture. These changes require substantial investment in innovation and retooling.
Finding funding for a start-up can be difficult or expensive in traditional capital markets, and existing suppliers may need substantial capital to invest in retooling operations. The DOE has created a program to help companies gain access to funding that may otherwise be difficult to acquire, offering a reduced interest rate to encourage manufacturing to stay in the U.S.
Making use of DOE ATVM funding
The U.S. government has made a large commitment to support the auto industry in its transition to an all-electric future. The ATVM program finances costs associated with building new facilities, expanding or retooling existing facilities, and engaging in engineering integration. To be eligible for a loan under this program, a project must relate to qualifying ATVM vehicles or components, which extends down the supply chain to certain critical minerals. The Inflation Reduction Act (IRA), enacted in 2022, expanded the definition of ATVMs to include vehicles such as boats, ATVs, and large trucks, increasing the number of companies that can qualify for an ATVM loan.
The largest advantages to obtaining an ATVM loan are the low interest rate and access to capital that can be difficult to secure through a commercial lender. The interest rate is based on the applicable treasury rate for the tenor of the loan. The interest savings on a $500 million loan with a tenor of 10 years can exceed $200 million over the life of the loan, depending on the creditworthiness of the borrower.
This chart shows an illustrative example of how ATVM interest savings would add up on a loan of $500 million over 10 years. The interest savings could total $240 million for some borrowers.
Hurdles to obtaining DOE ATVM funding
The largest hurdle related to the ATVM loan program is the rigorous application and approval process. The process begins with the submission of an application that contains a business plan, technical details of the project (including environmental factors) and a financial model. Once the application is approved, the project goes through due diligence which includes market, financial and technical reviews as well as a term-sheet negotiation.
The financial model is a critical part of the application and often holds up the application acceptance and loan approval process. The application and loan approval require a dynamic, well substantiated three-statement financial model. The model often evolves throughout the process as additional requirements are determined and refinements needed. The entire process tends to put a strain on the company as it tries to handle day-to-day activities in conjunction with the loan application and approval process.
Approval can take several months, so applying as early as possible is important to allow time for the process to complete. In addition, costs related to the project do not become eligible for financing until the application has been deemed to be substantially complete. Therefore, earlier approval of the application leads to more of the project being eligible for ATVM financing.
Finding legal counsel and financial advisory assistance with experience in the ATVM program can be helpful in speeding up the process and increasing the likelihood of the loan being approved. In addition, assistance may be needed to handle the time burden that comes with the application and due diligence process.
For companies that have the time, energy and stamina to complete the ATVM loan process, there is a significant opportunity available through the ATVM loan program due to the access to capital and loan cost savings. These savings can help new market entrants and existing companies boost their cash flow significantly as they work to meet growing demand in a rapidly changing market.
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