Sovereign Guarantees & Verification

Broadly, Sovereign Guarantees (SGs) are given by host governments to assure project lenders that the government will take certain actions or refrain from taking certain actions affecting the project. For project finance purposes, an SG serves as a capital guarantee, transferring risk to the government in the event of default, usually as part of public-private cooperation (such as a public-private partnership) in line with policies, initiatives, mandates or particular goals of that country.

Governments will want to issue an SG for the full project’s value when they have confidence in the private-sector developers and when that SG will stimulate and accelerate investments in their country. Often government agencies will also want to realize the benefits of the project(s), once operational, such as electric grid stability, energy, food and water security, affordable housing, or other infrastructure.

Developed countries almost never issue SGs for projects in their own country because they do not need to. In more affluent countries, private-sector infrastructure projects are already obtaining financing at reasonable rates (even if the private parties move slowly or change terms unexpectedly), so the government need not partner to make that happen.

But many developing countries and emerging/frontier market host governments will partner or cooperate with private developers to streamline the process. An SG can greatly accelerate fundraising, and is particularly useful no matter what the country’s economic status for establishing new industries, creating jobs, and or stimulating growth.

How to obtain and use a Sovereign Guarantee

In smaller nations, either you need to use diplomatic ties or you’ll need to use new or existing connections to high-level government officials (e.g., President or Vice President) to gain proper attention by the Minister of Finance (MoF).

Note that we ordinarily accept SGs issued only by the MoF or when issuing authority has been given to another agency by law (and we would need to show the actual legislation or executive order authorization to our underwriters). SGs are usually free to the developer, but also increasingly uncommon due to IMF pressures, so if that is the case, an example below suggests that the government can compel a bank to issue and send a BG/SbLC via Swift MT760 or AvPN instead of an SG. When the IMF blocks SGs, these alternative guarantees make more sense to preserve the benefits of the Capital Guarantee Program. All guarantee options here. 

What if the country cannot issue a usable Sovereign Guarantee? What are the COVID-era Best Practices?

Recent, COVID-era challenges point to the best practice of government leaders not using an SG at all. They can instead simply ask a local bank to issue a Bank Guarantee / Standby Letter of Credit or to Avalize our Promissory Note (AvPN) directly, in lieu of an SG, because with our model, a bank would be asked to verify/authenticate and then SWIFT the SG anyway, bank-to-bank, so this streamlines delivering the guarantee instrument while sidestepping any in-country politics or unworkable policies.

See in3finance.com/product/cgp-package for these alternative templates, that can be sent to the bank nominated by the government (ask them for a draft of what they would issue, using their format) if the SG is not feasible. 

Is the Project Developer concerned about covering the initial cost of a guarantee?

Of the acceptable guarantee options (facilitation guide), the SG and Avalized Promissory Note (AvPN) are the least costly — often free or close to free to developers. The AvPN does require a creditworthy party as the primary guarantor (the bank is secondary with an AvPN) so that bank providing the Aval is not exposed to undue risk.

Visit In3’s Proposal Builder for the proper MS Word template that provides the preferred verbiage.

For a comparison of cost/benefits and advantages of CGP versus funding projects without such a guarantee see the table here.

Pre-Qualifying Projects — please read

If your project qualifies in terms of our 4 S’s — Size ($25 million or more; $50m preferred), Sector (anything that, at least, does no social/environmental harm), Stage (any, in a country without sanctions and with properly disclosed uses of funds), then for Surety, the 4th “S,” we may be able to issue a signed Letter of Intent (LOI) or Expression of Interest (EOI) in support of obtaining government participation for one or more projects.

This can help developers clarify

  1. The public benefit of the project(s), enabled by the financing
  2. Who will do what? Basics of a public-private partnership or at least the type of cooperation that will be required.
  3. Who will own the project(s) and how will the various stakeholders benefit?
  4. How long does it take to receive funding, once the SG is received?

Here are the main steps and best practices for using an issued Sovereign Guarantee to expedite project finance via In3’s capital partners:

  1. Receive and review with us the verbiage used on a “soft” copy of the SG, usually in PDF or MS Word. This should include the Minister’s name and on ministry letterhead, or a stamp or seal. Download our recommended template in MS Word.
    • Check that the issuer is either the country’s Ministry of Finance (MoF) or equivalent, with direct ties to the national treasury, or with delegated, legal authority from the MoF.
    • The “beneficiary” (investor or lender) should be specified by name, for now “In3 Capital”. Ask for our template of recommended verbiage and use that as a guide. Otherwise, language in the SG may need to be adjusted prior to issuance, or reissued entirely.
    • If an SG was not sent to you via the government directly, are you sure it is from a reputable source, agent, or third party? There are many fraudulent SGs that travel around looking for victims.
  2. Request that the issued SG be verified and authenticated by a rated bank using our letter. Download template. This is a requirement.
    The bank selection does matter; the larger the better, but should be a rated bank (credit ratings such as Moody’s), ideally one that has an established RMA or RMA Plus (SWIFT) relationship.
  3. Ask that the signed bank letter be sent via SWIFT using MT-760. Some banks will push back at first and decline to verify the SG, which is the point of this step — to make sure the SG itself is valid and issued with the proper authority. Some banks will ask that it go through a governmental approval step first, such as formal approval through the nation’s Parliament or whatever system applies.
    Note on SWIFT fees: Issuer (developer’s bank) and Recipient (underwriter’s bank) are each responsible for their own fees charged by their respective banks.
  4. Establish or disclose the domicile of the Special Purpose Vehicle (SPV) that will own the project’s assets. Typically this is in the United Kingdom, but there are other options. Set up an escrow account with the local bank to be used for transferring funds.
  5. Developer enters contracts for the funding — typically a Loan Agreement and Share Purchase Agreement. Contracts are signed, notarized and delivered.
  6. Have the original (signed hard copy) of the SG sent to the vault of the SPV’s bank. NOTE: Upon receipt of the SG hardcopy and MT-760 SWIFT verification using the RWA, initial funding flows within 30-45 days after closing, per the established draw schedule.
  7. Send us a letter acknowledging the above steps and the existence of the underlying public-private cooperation being employed. We will confirm receipt and offer approvals at each step.

Wrap-up / Recap

These are the main steps and tips for obtaining and using a Sovereign Guarantee for financing projects through us. This can actually happen quite quickly, once the various parties agree to proceed.

See our investment terms & conditions for the quantitative aspects of an acceptable project or portfolio to be financed — minimums do apply. This is part of our briefing materials, available to qualified project developers and their authorized agents for review.

Finally, note: