VeraSun's Warning: Is the Bankruptcy Bug Spreading?

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This year has brought more than its share of surprises to the energy industry, but the bankruptcy of ethanol giant VeraSun Energy (s VSE) was one that few would have predicted at the beginning of the year.

The stock started the year at $15.28, down from its June 2006 IPO price of $23 a share, but there was little indication of the sequence of hardships that would prompt the company to file for Chapter 11 bankruptcy, which it did on Oct. 31. In VeraSun’s own words:

The Company suffered significant losses in the third quarter of 2008 from a dramatic spike in its corn costs, reflecting in part costs attributable to its corn procurement and hedging arrangements, and historically unfavorable margins. Beginning in the third quarter, worsening capital market conditions and a tightening of trade credit resulted in severe constraints on the Company’s liquidity position.

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Corn and oil prices had been soaring when VeraSun locked into those arrangements. They have since plunged, making those contracts costly to maintain. Meanwhile, ethanol prices have also plunged, and cheaper oil means less demand for alternative fuels for now.

Today, the NYSE suspended trading in the stock, but not before it traded briefly as low as 2 cents a share. At that level, VeraSun had a market value of $3.1 million. The stock rebounded to 28 cents a share before trading was suspended.

VeraSun said it “plans to resume normal operations” while it works with lenders, and that suppliers can expect to be paid in full. The AP reported that the company was seeking $190 million just to make payroll.

A mix of bad decisions and terrible timing brought VeraSun down. Concerns about the longer-term outlook for corn-based ethanol may have made the company especially vulnerable, but the volatility of commodity prices and scarcity of credit are factors facing other companies as well.

VeraSun may be one of the unlucky few to file for Chapter 11, but the mere evidence that bankruptcies are beginning to spread beyond the financial industry will give executives and investors alike new thoughts to keep them awake at night.

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