Nov. 1 (Bloomberg) -- VeraSun Energy Corp., the second- largest U.S. ethanol producer by capacity, sought bankruptcy protection after racking up losses on hedges for corn, a raw material used to make the fuel.

The petition for Chapter 11 bankruptcy in Wilmington, Delaware, listed both assets and debt of more than $1 billion. The Sioux Falls, South Dakota-based producer and seller of ethanol, formed in 2001, has 16 production facilities in eight states, and an annual capacity of around 1.64 billion gallons of ethanol, according to its Web site. Twenty-four affiliates also filed.

Verasun temporarily shut production at its plant in Linden, Indiana, on Oct. 28 without giving a reason. The company's shares have plunged 89 percent since Sept. 16, a day before it said it may report a third-quarter net loss of as much as $103 million because of bad hedging bets.

The bankruptcy is ``a pretty big deal for the industry,'' said Pavel Molchanov, an analyst at Raymond James & Associates in Houston, before the filing was made public.

A hedge is a financial instrument that can be used to lock in commodity costs.

The 30 largest consolidated creditors without collateral backing their claims are owed a total of $524.9 million, court papers filed yesterday show. Wells Fargo Bank, as indentured trustee for the company's 9.375 percent notes, was listed as the largest unsecured creditor. The amount of the claim is listed as $447.4 million.

Corn Costs

VeraSun's $450 million of 9.375 percent notes due in 2017 traded at 7.5 cents on the dollar yesterday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. VeraSun's $210 million of 9.875 percent notes due in 2012 traded at 41.5 cents on the dollar yesterday.

The company said it locked in corn costs as the price reached almost $8 a bushel after floods threatened Midwest crops. By late October, corn had tumbled to a 21-month low, to $3.64 a bushel, on concerns that economic weakness could hurt demand for food and livestock feed.

Moody's yesterday cautioned that the company could default on its debt, noting that Verasun has ``low cash balances'' of just $6 million under a $125 million revolving credit facility.

Price volatility for both its main raw material, corn, and its end product, ethanol, were also creating difficulties for the company, Moody's said, noting that low barriers to entry and industry economics driven by government legislation have created overcapacity in the ethanol business.

Verasun joins Greater Ohio Ethanol, a closely held refiner, and Gateway Ethanol LLC, in bankruptcy. Other troubled ethanol makers include Biofuel Energy Corp., which said it has $46 million in combined corn, ethanol and natural gas hedge and mark-to-market losses and may restructure.

`Liquidity Constraints'

The bankruptcy ``allows VeraSun to address its short-term liquidity constraints as we navigate historically challenging market conditions while we focus on restructuring to address the company's long-term future,'' Don Endres, chief executive officer of VeraSun, said in a statement yesterday.

Ethanol futures on the Chicago Board of Trade have fallen 26 percent this year to $1.763 a gallon, down 58 percent from a high of $4.23 on June 20, 2006, the same month VeraSun held its initial public offering.

Corn, the primary ingredient for ethanol produced in the U.S., has fallen 12 percent this year.

There are 178 ethanol distilleries in the U.S., with the capacity to produce 11 billion gallons of ethanol annually, according to the Renewable Fuels Association in Washington.

Closely held Poet LLC, based in Sioux Falls, is the largest producer.

The case is: In re VeraSun BioDiesel LLC, 08-12605, U.S. Bankruptcy Court, District of Delaware (Wilmington).

To contact the reporters on this story: Dawn McCarty in Wilmington, Delaware at dmccarty@bloomberg.net; Tiffany Kary in New York bankruptcy court at tkary@bloomberg.net

Last Updated: November 1, 2008 00:01 EDT