VeraSun Energy Declares Bankruptcy

Verasun Energy - Investors - Press Releases.

As I hypothesized on Thursday, VeraSun Energy (VSE) has filed for Chapter 11 bankruptcy. The cause can be condensed to two sentences from the press release:

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.

The main culprit was their badly managed corn hedging followed by the inability to raise capital to bail themselves out.

The current financial climate makes one forget how completely different the world was 6 short months ago. Commodity prices were zooming up. Oil was on its way to $150 with most predicting $200 by now. If the predictions of the spring and early summer had been accurate, VeraSun would have been generating huge profits in the 3rd quarter rather than being pushed into bankruptcy. The lesson here is that thin margin businesses are one bad economic turn away from disaster.

Chapter 11 means the company will stay in business and restructure their debt to get back on their feet financially. Common share holders will probably get squat. This site’s Opportunities Portfolio started October 2008 with a 2% position in VSE which is now effectively zip.

Longer term this should help VeraSun as a company to structure itself for success in a tight margin environment. I will be watching to see where they go from here.

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