EXHIBIT 10.3

 

FIRST AMENDMENT TO
FORBEARANCE AGREEMENT

 

THIS FIRST AMENDMENT TO FORBEARANCE AGREEMENT (the “Agreement”) is made as of
this 30th  day December, 2010 (the “Effective Date”), between HERON LAKE
BIOENERGY, LLC, a Minnesota limited liability company (“Borrower”) and AGSTAR
FINANCIAL SERVICES, PCA, a United States instrumentality (“Lender”).

 

RECITALS

 

A.                                         The Borrower is indebted to Lender
under the following promissory notes (collectively, the “Notes”):

 

(i)                                     A Term Note dated October 1, 2007 in the
original principal amount of $59,583,000.00 (“Note One”);

 

(ii)                                  A Term Revolving Note dated October 1,
2009 in the original principal amount of $5,000,000.00 (“Note Two”) ; and

 

(iii)                               A Second Amended and Restated Revolving Line
of Credit Note dated July 2, 2010, in the original principal amount of
$6,750,000.00 (“Note Three”).

 

B.                                         The Borrower’s obligations to the
Lender are further evidenced by an Fourth Amended and Restated Master Loan
Agreement dated as of October 1, 2007 (the “MLA”); a Third Supplement to the
Master Loan Agreement (Term Loan) dated as of October 1, 2007 (the “Third
Supplement”); an Fourth Supplement to the Master Loan Agreement (Term Revolving
Loan) dated as of October 1, 2007 (the “Fourth Supplement”); and an Amended and
Restated Fifth Supplement to the Master Loan Agreement (Revolving Line of Credit
Loan) of even date herewith (the “Fifth Supplement”) between Borrower and Lender
(collectively, the “Loan Agreement”).

 

C.                                         The loans evidenced by the Notes and
the Loan Agreement and Supplements (the “Loans”) were made by Lender to Borrower
for the purpose of constructing and operating an ethanol production facility in
or near Heron Lake, Minnesota (the “Project”).

 

D.                                         As collateral for the Notes, the
Borrower has granted to Lender (among other things):

 

(i)                                     a Mortgage, Security Agreement and
Assignment of Rents and Leases dated September 29, 2005 and recorded in the
Office of the County Recorder of Jackson County on September 30, 2005, as
Instrument No. 244879 and as amended and restated by that certain Amended and
Restated Mortgage, Security Agreement and Assignment of Rents and Leases dated
November 20, 2006 and recorded in the Office of the County Recorder of Jackson
County on December 6, 2006 as Instrument No. 248498; Second Amended and Restated
Mortgage, Security Agreement and Assignment of Rents and

 

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Leases dated December 27, 2006 and recorded in the Office of the County Recorder
of Jackson County on December 27, 2006 as Instrument No. 248658 and Third
Amended and Restated Mortgage, Security Agreement and Assignment of Rents and
Leases dated May 18, 2007 and recorded in the Office of the County Recorder of
Jackson County on June 4, 2007 as Instrument No. A 250019 collectively, the
“Mortgage”) under which Lender has a lien in certain real property in Jackson
County, Minnesota, as further described in the Mortgage (the “Real Property”);

 

(ii)                                  security interests in all of the assets of
the Borrower, including without limitation, inventory, chattel paper, accounts,
equipment, general intangibles, deposit accounts, and commodity accounts,
(collectively, the “Collateral”) pursuant to the provisions of a Security
Agreement dated September 29, 2005 (the “Security Agreement”); and

 

(iii)                               collateral assignments of all material
contracts related to the Project, including, without limitation, construction
agreements, ethanol and distillers grains marketing agreements, grain
procurement contracts and coal supply and transport agreement (collectively, the
“Assignments”).

 

E.                                           The Loan Agreement, the Notes, the
Mortgage, the Security Agreement, the Assignments and all other documents
evidencing the obligations of the Borrower under the Loans are referred to in
this Agreement as the “Loan Documents.” All capitalized terms not otherwise
defined in this Agreement shall have the meaning attributed to such terms in the
Loan Documents.

 

F.                                      The Borrower and the Lender have
previously entered into a Forbearance Agreement dated as of July 2, 2010 which
provided for a forbearance period which expires on December 31, 2010.

 

G.                                    The Borrower has failed to maintain the
Fixed Charge Coverage Ratio financial covenant required to be maintained by
Section 5.01(g) of the MLA. As a result of the Borrower’s financial covenant
defaults, Lender has the option to declare the Notes fully and immediately due
and payable without defense or right of setoff.

 

H.                                    As a result of the financial covenant
default, the Borrower has requested  Lender waive the Borrower’s violation of
such covenant and forbear from (a) declaring the Notes fully and immediately due
and payable; and (b) from exercising its enforcement and collection rights.

 

I.                                         In consideration of the facts set
forth in these Recitals, which the parties agree are true and correct, and in
consideration for entering into this Agreement, the Lender is willing to grant
such forbearance upon the terms and conditions set forth in this Agreement.

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, the parties hereto agree as follows:

 

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1.                                          Acknowledgment of Enforceability and
Event of Default. The Borrower acknowledges due execution and delivery of the
Loan Agreement, Notes, Mortgage and Security Agreement and acknowledges that the
same are valid and enforceable by the Lender against the Borrower in accordance
with their terms. The Borrower acknowledges that it is in default under the Loan
Documents by its failure to maintain the Fixed Charge Coverage Ratio financial
covenant required to be maintained by Section 5.01(g) of the MLA.  The Lender
acknowledges that the Borrower has paid all installments of principal and
interest, fees, expenses, charges and other amounts payable under the Loan
Documents when due, except for the default interest covered by this Agreement.

 

2.                                          Acknowledgment of Debt. The Borrower
acknowledges that, as a result of the defaults of the Borrower, Lender has the
option to declare that the indebtedness evidenced by the Notes is, absent the
provision of this Agreement, due and payable without any claims, defenses,
counterclaims, offsets, and/or cross-complaints, or demands of any kind or
nature whatsoever. The Borrower further acknowledges that the principal balance,
accrued and unpaid interest, and late charges owed on each of the Notes as of
the Effective Date, is as follows:

 

Note

 

Outstanding
Principal Balance
as of November
2010

 

Accrued Interest
as of November
30, 2010

 

Late Charges
of November 30,
2010

 

Total
Principal,
Interest, and
Late Charges
as of
November 30,
 2010

 

Term Fixed

 

$

37,135,327.37

 

$

200,835.98

 

 

 

$

37,336,163.35

 

Term Note Libor

 

$

11,540,814.25

 

$

33,259.36

 

 

 

$

11,574,073.61

 

Term Revolving Note

 

$

1,155,872.24

 

$

3,331.10

 

 

 

$

1,159,203.34

 

Revolving Line of Credit Note

 

$

4,500,000.00

 

$

26,136.97

 

 

 

$

4,526,136.97

 

TOTAL

 

$

54,332,013.86

 

$

263,563.41

 

$

454,438.58

 

$

55,050,015.85

 

 

In addition to said principal and interest balances, the Lender has incurred,
and will continue to incur, costs and legal expenses as a result of the
Borrower’s defaults under the Loan Documents which amounts are, in accordance
with the terms of the Loan Documents, due and payable by the Borrower.

 

3.                                          Forbearance Period. Provided that
the Conditions Precedent set forth below have first been satisfied and Borrower
complies with the terms of this Agreement, the Lender agrees it will not declare
a default under the Loan Documents or enforce any remedies available to it under
the Loan Documents or applicable law on account of the Borrower’s default
beginning on the Effective Date, and ending on the earlier of an Event of
Default (as defined below) or March 1, 2011 (the “Forbearance Period”)

 

4.                                          Conditions Precedent. As conditions
precedent to the Lender’s forbearance, as set forth in the preceding paragraph,
the following agreements, documents, and other items shall have been executed
and/or delivered to the Lender, and the following events shall have occurred:

 

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a.                                           Execution and Delivery of
Agreement. The Borrower shall have executed and delivered to the Lender this
Agreement and any other documents and agreements ancillary or incident hereto.

 

b.                                           Other Documentation. The Borrower
shall have obtained and delivered to the Lender any and all further
documentation reasonably requested by the Lender.

 

c.                                           Fees. The Borrower shall have paid
a wavier and forbearance fee in the amount of $25,000.00 and all other costs and
expenses incurred by Lender in connection with the execution of this Agreement,
including, without limitation, reasonable attorneys’ fees.

 

5.                                      Interest Rates, Payment during
Forbearance Period and Deferred Interest. The parties agree that the Loans shall
be repaid in accordance with the following terms:

 

a.                                         Interest. Except as provided by
subsection 5(b), interest shall continue to accrue on the unpaid principal
balance of the Notes at the rates provided in the Loan Documents (including, as
applicable, interest at the Default Rate specified in the Loan Documents).

 

b.                                         Default Interest.  During the
Forbearance Period, and so long as the Borrower satisfies all of its obligations
under this Agreement and the Loan Documents, the unpaid principal balance of the
Notes shall accrue at the contract specified in the Loan Documents, rather than
the Default Rate.

 

c.                                         Payments During Forbearance Period.
During the Forbearance Period, the Borrower shall pay to Lender all periodic
payments of principal and interest required under the Loan Documents and this
Agreement on each Monthly Payment Date.

 

d.                                           Deferred Interest.

 

i.                                                   Payment of interest accrued
at the Default Rate prior to the Effective Date (the “Deferred Interest”) in the
amount of $454,438.58, shall be deferred until the end of the Forbearance Period
so long as the Borrower satisfies all of the obligations of this Agreement and
otherwise complies with all loan covenants and payment obligations under the
Loan Documents.

 

ii.                                           Provided that the Borrower
complies with all loan covenants and payment obligations under the Loan
Documents, Lender agrees to accept payment of an amount equal to fifty percent
(50%) of the Deferred Interest at the end of the Forbearance Period in full
satisfaction of the obligation of the Borrower to pay the Deferred Interest.
Upon such payment, the Lender shall waive the payment of the remaining fifty
percent (50%) of the Deferred Interest.

 

6.                                      Distributions During Forbearance Period.
Notwithstanding any provisions contained in the Loan Documents, Borrower shall
not make, or cause to be made, any Distributions other than Tax Distributions
permitted by the Loan Documents during the Forbearance Period.

 

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7.                                           Term Revolving Loan.
Notwithstanding any provisions contained in the MLA or the Fourth Supplement,
advances pursuant to the Fourth Supplement and Note Two shall only be advanced
for the purpose of funding the Shaw engineering and mercury emission Remediation
Project (the “Shaw Remediation Project”). Such advances shall not exceed
$1,400,000.00. No advances shall be made on the Term Revolving Loan until the
Lender receives “date-down endorsement” to its existing title insurance policy
showing that marketable fee title to the Real Property is in the Borrower,
subject only to the encumbrances specified in the Mortgage and any Permitted
Liens and insuring the Mortgage to be a first lien on the Real Property subject
only to Permitted Liens and encumbrances approved by Lender. To obtain advances
on the Term Revolving Loan the Borrower shall submit to the Lender written draw
requests and project cost certifications in form and substance satisfactory to
the Lender. Within three (3) Business Days of its receipt of such draw request,
the Lender shall notify the Borrower of its consent to or refusal of the
requested Advance, and, if approved by the Lender, shall disburse funds to the
parties identified in the draw request pursuant to the terms of the Lender’s
consent of the draw request. The Lender assumes no liability for the accuracy of
any certifications presented to it nor for any request for Advances by the
Borrower in violation hereof or of the Loan Documents. The Lender shall disburse
all Advances on the Revolving Term Loan in accordance with this Agreement to the
person which is entitled thereto, as set forth in the draw request. Each such
draw request shall include a statement sworn to by the Borrower, listing the
names, addresses, and telephone numbers, the work, labor, and/or materials to be
supplied by, and the total estimated amounts to be paid with respect to the Shaw
Remediation Project. Lender shall receive a general lien waiver from all persons
covering all disbursements made hereunder and an express lien waiver from each
supplier and sub-contractor having a contract with respect to the Shaw
Remediation Project in excess of ten thousand ($10,000.00) dollars through the
date of the immediately preceding disbursement to it hereunder; except for the
final disbursement, which shall be paid only upon receipt of all lien waivers
from contractors, subcontractors and suppliers. The Lender shall not disburse
any Advance hereunder if there have been any changes in the status of title as
set forth in the title insurance which have not been consented to in writing by
the Lender and such change would have a Material Adverse Effect. If any such
change has not been so consented to, the Borrower shall promptly and at its sole
cost and expense restore the status of title to that reflected in the title
insurance. The draw requests, mechanics’ lien waivers, certificates, and any and
all other instruments or documents required to be delivered in connection with
an Advance shall be in form and substance reasonably satisfactory to the Lender.

 

8.                                          Revolving Line of Credit. Provided
that the Conditions Precedent set forth in this Agreement are met by the
Borrower, Lender agrees to renew the Revolving Loan subject to the conditions
and terms set forth in the First Amendment to Fifth Supplement to the Master
Loan Agreement (Revolving Line of Credit Loan) and Third Amended and Restated
Revolving Line of Credit Note of even date herewith.

 

9.                                          Retention of Chief Operations
Manager. The Borrower shall retain a Chief Operations Manager (“COM”) acceptable
to the Lender in its sole discretion on or before the Effective Date with full
and complete authority to implement in a commercially reasonable manner the
Performance Improvement Plan dated November 17, 2010 (the “PIP”), a copy of
which has previously been provided the Lender. The COM shall provide Lender a
weekly report

 

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of the results of the implementation of the PIP and, together with the
Borrower’s CEO, of operations and containing such information as may be
requested by Lender for the immediately preceding week on or before 5:00 p.m.
Central Time each Monday, beginning January 10, 2011. The COM shall not be
removed, or his management authority modified, without the prior written consent
of the Lender.

 

10.                               Contribution of Equity.  Subject to the escrow
provisions set forth in the paragraph, Borrower shall obtain additional equity
investments on terms and conditions acceptable to Lender of an amount not less
than $4,500,000.00 (the “New Equity”) on or before March 1, 2011. Borrower shall
provide Lender with weekly reports of its receipt of any legally binding
commitments for the New Equity, including copies of all subscription agreements,
on or before 5:00 p.m. Central Time each Monday, beginning January 10, 2011. The
New Equity may be used by the Borrower for working capital purposes or, upon the
Lender’s prior written consent, which consent shall not be unreasonably
withheld, and in an amount not to exceed $1,400,000.00, for the costs of the
Shaw Remediation Project. The New Equity will be held in escrow pursuant to the
terms of an escrow agreement acceptable to the Lender, pending Lender’s approval
of the Borrower’s corn oil separation project and Lender and Borrower entering
into mutually agreeable amendments to the Loan Documents which may provide,
among other terms, an extension of the Revolving Loan beyond the Forbearance
Period, reamortization of principal payments on the terms loans, resetting of
the term revolving loan and adjustments to interest rates, and such other
changes to the terms, conditions and covenants of the Loan Documents as are
mutually agreeable to the Lender and Borrower.

 

11.                               Events of Default. For purposes of this
Agreement, “Event of Default” means (a) any Events of Default under the Loan
Documents first occurring after the Effective Date, or at any prior date but
regarding which the Lender did not have actual knowledge (excluding Events of
Default relating to the matters for which forbearance is provided hereunder), or
(b) the occurrence of any one or more of the following:

 

a.                                           Payment Defaults. Borrower shall
fail to pay, when due, any amounts required to be paid hereunder, including any
amounts owed on the expiration of the Forbearance Period.

 

b.                                           Nonmonetary Defaults. Borrower
shall fail to observe or perform any covenant, condition, or agreement to be
observed or performed by them under this Agreement for a period of ten (10) days
after written notice, specifying such default and requesting that it be
remedied, provided however that no Event of Default shall be deemed to exist if,
within said ten (10) day period, Borrower has commenced appropriate action to
remedy such failure and shall diligently and continuously pursue such action
until such cure is completed, unless such cure is or cannot be completed within
thirty (30) days after written notice shall have been given.

 

c.                                           Bankruptcy. Any party to this
Agreement shall file a petition in bankruptcy or for reorganization or for an
arrangement pursuant to any present or future state or federal bankruptcy law or
under any similar federal or state law, or shall have an order for relief
pursuant to 11 U.S.C. § 303 entered in any such proceeding brought by any other

 

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creditor, or shall make a general assignment for the benefit of their creditors.

 

d.                                           Creditor Proceedings. The
commencement of foreclosure or other proceeding to obtain possession of the Real
Property and/or the Collateral, whether by judicial proceeding, self-help,
repossession, garnishment, execution or any other method, by any creditor of the
Borrower.

 

12.                                    Remedies. Upon the occurrence of an Event
of Default (i) the entire unpaid balance of the Loans, including all unpaid
principal, accrued interest, default charges and costs and expenses incurred by
Lender in connection with the Loans, including attorney fees shall beimmediately
due and payable by Borrower, (ii) the Forbearance Period shall, at the option of
Lender, terminate and Lender may, in its sole discretion, and without further
demand or notice to Borrower, protect and enforce all of its legal, contractual
and equitable rights and remedies under the Loan Documents or this Agreement,
(iii) the Lender may apply all amounts that Borrower has on deposit with the
Lender, including, without limitation, all escrowed funds, to the payment of the
outstanding principal balance, accrued interest, default charges, and the costs
and expenses of collection, including attorneys’ fees, in such order as Lender
may deem appropriate, and (iv) the Lender may seek, and Borrower shall not
object to, the appointment of a receiver for the Real Property and the
Collateral. Each and every power or remedy herein specifically given shall be in
addition to every other power or remedy, existing or implied, given now or
hereafter existing at law or in equity, and each and every power and remedy
herein specifically given or otherwise so existing may be exercised from time to
time and as often and in such order as may be deemed expedient by Lender, and
the exercise or the beginning of the exercise of one power or remedy shall not
be deemed a waiver of the right to exercise at the same time or thereafter any
other power or remedy. No delay or omission of Lender in the exercise of any
right or power accruing hereunder shall impair any such right or power or be
construed to be a waiver of any default or acquiescence therein.

 

13.                                             Waiver and Release.  To the
extent any claims or defenses may exist, Borrower, on behalf of itself and its
wholly-owned subsidiary, Lakefield Farmers Elevator, LLC, and their respective
successors and assigns, hereby forever and irrevocably releases Lender and its
officers, representatives, agents, attorneys, employees, predecessors,
successors, and assigns, from any and all such claims and defenses, whether
known or unknown arising out of any acts or omissions occurring prior to the
date of this Agreement (including without limitation, those relating to late
fees currently outstanding or previously paid), provided that Borrower does not
waive any rights afforded it hereunder.

 

14.                                             Effect of Agreement. Except as
expressly provided in this Agreement, the Loan Agreement, the Notes, the
Mortgage and the Security Agreement remain in full force and effect in
accordance with their respective terms, and this Agreement shall not be
construed to: (i) impair the validity, perfection or priority of any security
interest or lien securing the Loans; (ii) waive or impair any rights, powers or
remedies of the Lender under the Loan Agreement, the Notes, the Mortgage or the
Security Agreement; or (iii) constitute an agreement by the Lender or require it
to extend the Forbearance Period, or grant additional forbearance periods.

 

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15.                                    Representations and Warranties. The
Borrower represents and warrants to AgStar and Lender as follows:

 

a.                             Borrower. The Borrower is a limited liability
company duly organized and validly existing and in good standing under the laws
of the State of Minnesota and is qualified to do business in all jurisdictions
in which the nature of its business makes such qualification necessary and where
failure to so qualify would have a Material Adverse Effect on its respective
financial condition or operations. The Borrower has the power and authority to
own and operate its assets and to carry on its business and to execute, deliver,
and perform its obligations under the Loan Documents and this Agreement.

 

b.                           Execution. The execution, delivery and performance
by the Borrower of the this Agreement is within the Borrower’s powers, has been
duly authorized by all necessary action, does not contravene: (i) the articles
of organization or operating agreements of the Borrower; or (ii) any law or any
contractual restriction binding on or affecting the Borrower, and does not
result in or require the creation of any lien, security interest or other charge
or encumbrance (other than pursuant to the terms of the Loan Documents) upon or
with respect to any of its respective properties.

 

c.                                Enforceability. This Agreement is, and each of
the Loan Document to which the Borrower is a party are, or when delivered will
be, legal, valid and binding obligations of the Borrower enforceable against the
Borrower in accordance with their respective terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws
affecting the enforcement of creditor’s rights generally and by general
principles of equity.

 

d.                                Litigation. Except as specifically disclosed
in writing to the Lender, there is no pending or threatened action or proceeding
affecting the Borrower or any of the transactions contemplated hereby before any
court, governmental agency or arbitrator, which may materially adversely affect
the financial condition or operations of the Borrower. As of the date of this
Agreement, there are no outstanding judgments against the Borrower.

 

16.                               Miscellaneous.

 

a.                                Recitals Incorporated. The Recitals set forth
at the beginning of this Agreement are deemed incorporated herein, and the
parties hereto represent they are true, accurate and correct.

 

b.                                Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the State of Minnesota.

 

c.                                Severability. If any provision of this
Agreement shall be invalid, illegal or otherwise unenforceable, such provision
shall be severable from the remainder of such agreement and the validity,
legality and enforceability of the remaining provisions shall not

 

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be adversely affected or impaired thereby and shall remain in full force and
effect.

 

d.                                Counterparts. This Agreement may be executed
in two or more counterparts, all of which shall be considered one and the same
agreement and shall become effective when two or more counterparts have been
signed by each of the parties and delivered to the other parties.

 

e.                                Entire Agreement. This Agreement and the Loan
Documents set forth the entire agreement between the parties pertaining to the
transactions contemplated by this Agreement. This Agreement may be amended or
modified only by a written instrument signed by the party against which
enforcement is sought.

 

f.                                  Revival. If the incurring of any debt or any
payments of money or transfers of property made to the Lender by or on behalf of
the Borrower contemplated by this Agreement or the Loan Documents (collectively,
the “Transfer”) should for any reason subsequently be declared to be “voidable”
or “avoidable” within the meaning of any state or federal law relating to
creditor’s rights, including , without limitation, as fraudulent transfers,
preferences or otherwise voidable or recoverable payments of money or transfers
of property, in whole or in part, for any reason under the Bankruptcy Code or
any other federal or state law, and Lender is required to repay or restore any
Transfer, or the amount of any portion thereof, or upon the advice of its
counsel is advised to do so, then, as to any such amount repaid or restored
(including reasonable costs, expenses and attorneys’ fees of the Lender related
thereto), the liability of the Borrower shall automatically be revived,
reinstated and restored and shall exist as though such Transfer had never been
made.

 

IN WITNESS WHEREOF, the parties hereto have caused this agreement to be duly
executed and delivered as of the date and year first above written.

 

December 30, 2010

HERON LAKE BIOENERGY, LLC,

 

a Minnesota limited liability company

 

 

 

 

 

 

 

By

/s/ Robert J. Ferguson

 

 

Its: President

 

Dated: December 30, 2010

AGSTAR FINANCIAL SERVICES, PCA,

 

a United States instrumentality,

 

 

 

 

By:

/s/ Mark Schmidt

 

 

Mark Schmidt

 

 

Its: Vice President

 

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