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Rating Action:

Moody's assigns Aventine Caa1 CFR; rates new term loan Caa1

Global Credit Research - 01 Dec 2010

$200mm of new rated debt affected

New York, December 01, 2010 -- Moody's Investors Service assigned Aventine Renewable Energy Holdings, Inc.'s ("Aventine") a Caa1 Corporate Family Rating (CFR) and rated its proposed term loan B due 2015 Caa1. The proposed term loan will refinance $155 million of notes and provide approximately $29 million of cash for general corporate purposes. A speculative grade liquidity rating of SGL-4 (poor liquidity) was also assigned. These are first time ratings for Aventine since it emerged from bankruptcy on March 15, 2010. The outlook remains stable. The following summarizes the ratings.

Aventine Renewable Energy Holdings, Inc.

Ratings assigned:

Corporate Family Rating -- Caa1

Probability of Default Rating -- Caa1

$200mm Sr sec term loan B due 2015 -- Caa1 (LGD4, 54%)

Speculative grade liquidity rating - SGL-4

RATINGS RATIONALE

Aventine's CFR reflects its modest size ($431 million of revenues for the twelve months ended September 30, 2010), narrow product profile with predominately one commodity product (ethanol), poor liquidity and challenging ethanol industry fundamentals. The company currently operates ethanol plants with 202 million gallons per year (MGPY) of capacity in two locations, is in the process of completing and starting two new plants that will add 220MGPY of capacity, and has acquired a small 37MGPY plant that will bring total capacity to approximately 460MGPY. The ethanol industry is supported by a myriad of federal and state legislation that mandates the use of ethanol and provides economic incentives to blenders. However, despite ongoing positive governmental support (e.g., in 2010, the EPA has supported the use of E15 for model year 2007 and newer light vehicles) and increasing mandated usage under the renewable fuels standard, government legislation has not assured the profitability of producers. Cash margins have varied significantly, leaving producers with break-even cash margins at times, and played a role in many producers filing for bankruptcy protection in the past. The ratings also consider industry conditions including low barriers to entry, ethanol capacity and excess ethanol usage credits from prior years in excess of mandated demand, a large sophisticated customer base and the presence of competitors with substantially greater resources.

The ratings are supported by modest leverage for the rating category ($0.43 per gallon of capacity), attractive manufacturing assets such that Aventine believes it is a low cost producer, and a lower cost structure after restructuring in the bankruptcy process. Aventine enjoys new plants with low capital expenditure requirements, lower operating costs per gallon of ethanol produced at its wet mill plant, access to amply corn supplies in the areas surrounding its plants and low transportation costs due to water access at the Mt. Vernon plant.

The company's SGL-4 speculative grade liquidity rating (poor liquidity) based on our expectations that it does not currently have sufficient backup liquidity to cover potential periods of poor industry margins, fluctuating liquidity needs for hedging and unforeseen sector circumstances, which industry participants have faced in the past. Most of the firm's capital expenditures for its new plants and the acquisition cost of the Canton, IL facility will be completed in 2010, but the company will be required to fund the working capital associated with the new plants. We would expect the firm to have at least $100-$150 million of excess liquidity sources after it has all of its new facilities operating before we would consider liquidity adequate. Liquidity is provided by unrestricted cash balances ($42 million as of September 30, 2010), a $20 million revolving credit facility due 2013 and expectations for positive cash flows from operations. Industry margins have historically varied significantly and future positive cash flow from operations is difficult to predict. The proposed term loan financing will add approximately $29 million to cash balances and the company had $19 million of restricted cash (as of September 30, 2010) that could be partially or wholly released to the company in the future. As of September 30, 2010, the $20 million revolver had no borrowings and $5.5 million of letters of credit, leaving $9.4 million of availability. We would expect the revolver to be increased to support greater working capital and potential hedging needs as the company grows its capacity. Additionally, the company could seek other sources of funds, such as an equity offering. However, our liquidity analysis only considers the company's current sources of liquidity, given the lack of certainty associated with alternate sources.

The stable outlook reflects our expectations that the firm will seamlessly startup its new capacity and work to improve its liquidity. The industry is supported by favorable government legislation that can support near-term cash requirements, expectations for steady operating cash flow from its recent ethanol capacity addition, and favorable ethanol legislative environment conditions. The rating could be upgraded if the company is successful in starting up its new plants, improves its liquidity such that it has at least $100-150 million of excess liquidity and generates positive free cash flow. A deterioration in liquidity, further levering of Aventine's balance sheet or prolonged periods of unattractive operating margins could put negative pressure on the rating.

The principal methodologies used in this rating were Global Chemical Industry published in December 2009, Speculative Grade Liquidity Ratings published in September 2002, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Aventine is a producer and marketer in the United States of ethanol used as a blending component for gasoline. It produces ethanol and co-products at its wholly-owned Pekin, IL wet milling and dry milling plants and its dry milling Aurora, NE plant. It is building two new 110MGPY dry mill facilities in Mt Vernon, IL (to start in Q4 2010) and Aurora, NE (to start in H1 2010), and purchased a 37MGPY facility in Canton, IL in August 2010. The firm emerged from bankruptcy on March 15, 2010. Revenues for the twelve months ended September 30, 2010 were approximately $431 million.

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Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

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Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

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New York
James Wilkins
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
John Rogers
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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Moody's assigns Aventine Caa1 CFR; rates new term loan Caa1
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