Types of Non-Cash Assets that can be used for In3CAP Guarantees
Assets or securities that may be used as collateral to obtain a Completion Assurance Guarantee (CAG):
- Buildings, commercial real estate, production facilities, … or other tangible assets
- Rare metals (silver, platinum) or gemstones with proper chain of custody and appraisal
- Fine Art
- Public Equities
- Bonds, ISIN-registered and top-rated, corporate or government
- MTNs – Medium-Term Notes
- Gold with a Safe Keeping Record (SKR)
The acceptability of the proposed asset as collateral for a Standby Letter of Credit (the most widely used) is up to the involved banker. You will need to explain that this guarantee is not for trade finance purposes (it will not be cashed to pay any seller) but instead serves as completion security during construction for project finance. If the banker is not aware of your intent, they might say that only cash on deposit is usable as collateral, a common misperception. More at Communicating with Bankers.
If they insist on cash or equivalents, you can point out that if you had cash (minimum is 25%) you could simply use that as a deposit, for slightly better terms and faster draws, and thus would not need the banker at all. Compare CAP’s cash deposit to a CAP guarantee or see below.
Making Sense out of these non-cash Asset Options
The first 3 asset types, shown above, usually require professional appraisal and chain of custody records. The last 3 types – Bonds, MTNs, or gold – do not require a bank-issued SbLC, and can be used directly as a guarantee for In3CAP funding.
Balance Sheet depth and credit history: When the guarantee applicant is particularly flush, and/or known to the involved banker as highly creditworthy, the applicant’s Balance Sheet may be sufficient for obtaining an SbLC or short-term line (cash loan) without collateral.
New Alternative to a Guarantee for 2024! Cash or equivalents (a line of credit, funds from a bridge loan, cash on deposit such as in a money market account), can also serve as a counterparty’s “deposit” for 100% funding and still CAP funding can be arranged as a minority carried equity. Cash is not necessary with a qualifying guarantee (CAG), and the above assets, when available and acceptable to the involved banker as a CAG, help preserve cash, which is ordinarily not required for this type of SbLC bank instrument.
- When cash is used to secure CAP funding, it is held during the draw period and returned in lump sum with the final drawdown of proceeds, typically 2x-4x the deposited funds.
- Minimum cash deposit is ~25% of the total requested investment.
- Draws are faster with a larger deposit — for example, it might take just 10-12 months to receive all the project’s funding with a 50% deposit (2x), but more like 18-24 months with just 25% deposit (4x).
- Also, the negotiated equity arrangement will be more favorable with a larger deposit, though we will not ask for a majority interest or control (majority voting rights), where equity carry ranges from 20-50% depending on the size of the deposit, similar to the “coverage” of a Completion Assurance Guarantee (CAG).
Do whatever works best for you, but note that cash deposits have slightly higher value toward negotiated terms than does a bank’s guarantee; cash is incrementally more efficient. Both are equally effective.
Note that In3 does not provide Completion Assurance Guarantees to clients; we deliver the vetting and funding when the project owner or sponsor can deliver either a cash deposit (25% or more) or bank-issued guarantee, such as the SbLC (33% or more). Larger cash deposits or guarantees tend to improve offered terms. We can help pre-qualify a project or portfolio for the best available terms. But to avoid initial fees, facilitating a guarantee or deposit is the client’s responsibility.
In some cases, when a project or portfolio meets our strict criteria, we can discuss arranging a Done For You (DFY) guarantee, a premium service under Joint Venture agreement, and/or through cooperation with the Impact Guarantee Fund.