In3CAP Funding Frequently Asked Questions (FAQs)

Do you need help deciding if In3’s Completion Assurance Program capital guarantee is right for you?

Want to know what type of leveraged financial instrument to use — Bank Guarantee (BG), or Standby Letter of Credit (SbLC), or endorsed Promissory Note (AvPN) or perhaps others?

Yes, but you don’t have time to read anything right now? Here’s a short appeal to come back when you do.

Below are answers to frequently asked questions about the mechanics and basic business arrangements of securing mid-market project capital with CAP guarantees. A “completion assurance” guarantee uses standard tools and rules, but in an innovative structure. If you are instead interested in FAQs on less common Sovereign Guarantees, ISIN-registered bonds, or other topics not addressed here, please let us know.

Click on the question below to jump to the answer:

1. What if the developer/owner/promoter does not have the balance sheet depth, or available seed money, to obtain a completion assurance guarantee?
2. What does the Completion Assurance Guarantee cover? What purpose does it serve? Why does In3’s funding partner need one? How do I obtain one?
3. Where does the money come from? Is it “guaranteed” as well? Funding terms & conditions?
4. How do invested/loaned funds get paid out?
5. How can the completion assurance guarantee be used?
6. What reassurance is there that the guarantee, once sent, will not be misused, called or cashed in?
7. Under what circumstances could the guarantee be called, drawn, or cashed?
8. What are the differences between the various types of qualifying completion assurance guarantees? Which one should we use?
9. Why does CAP funding require a guarantee in the first place? Why can’t you do lump sum drawdown?

Have a question that isn’t addressed here? Review how to qualify and review existing Questions about how In3 works, then if your question remains unanswered, ask us!

1. What if the developer does not have the balance sheet depth or seed money to obtain a qualifying completion assurance guarantee on their own?

Answer: Such completion assurance (financial) guarantees can often be provided through counterparties, such as a sponsoring OEM (major supplier of equipment), well-established EPC firm or perhaps the General Contractor hired to build the project’s assets. Bringing in a “sponsor” (defined below) for the project’s guarantee may or may not entail giving them equity, but for “no money down” 100% financing, sharing a modest carried interest in the project in exchange for no or low underwriting costs is inevitable, as another party must take on a meaningful share of the risks, making their “risk-adjusted returns” a reasonable expectation.

What’s a “sponsor”? Either see related article, What is a “Sponsor” and why might you need one? or our Sponsor landing page, or keep reading this thread. In effect, a “sponsor” enables developers and promoters to qualify for better capital terms. The most common sponsor for renewables/cleantech and infrastructure projects is to involve an EPC, OEM or General Contractor that would also have an embedded financial interest in the project, thus an aligned incentive for bringing forward the completion assurance guarantee.

Types of sponsors (to get your creative juices flowing):

1. 1. 1. 1. 1. 1. • Private companies with a “strategic” interest in your project, such as high net worth but underperforming asset owners, well-established Engineering, Procurement & Construction (EPC) or General Contractor (GC) firms, integrators, or larger Original Equipment Manufacturers (OEMs).
                  • Private investors, such as High Net Worth Individuals (HNWIs), groups, or Family Offices — as a source of collateral for a bank’s Completion Assurance Guarantee via a convertible note or other short-term support. Can also be pooled using syndication.
                  • Government agencies (such as a sovereign government’s Ministry of Finance — emerging, developing and middle-income countries). Some government agencies, or public/private alliances, will have the authority to issue either a Sovereign Guarantee (SG) or to direct a bank to issue a Bank Guarantee / Standby Letter of Credit (BG/SbLC). Either the SG will come from the Ministry of Finance or an agency with proper delegated authority (be sure to identify the law or order that proves this) or by their request of a bank to issue the guarantee on their behalf for the project. Either of these scenarios are typically without any fees paid by the developer/owner.
                  • Not-for-Profit Organizations — NGOs such as Impact Foundations or similar endowments or institutions can sponsor or otherwise support projects they see as mission-aligned in order to realize the social and/or environmental impacts.
                  • Financial Institutions such as Top Banks or Multilaterals (such as US OPIC now DFC, or World Bank Group’s IBRD, EBRD, EBID, etc.), regional/multilateral development banks (MDBs), or even Export Credit Agencies (some Export-Import Banks), although these institutions typically provide insurance products, not proper financial guarantees. Generally, only commercial banks can issue a financial guarantee (Bank Guarantee, Standby Letter of Credit, etc.) using the SWIFT system. Low-rated or unrated bank Completion Assurance guarantees are subject to a steep discount, if the issuer is a real (legitimate) bank, and often our capital partners will make up the gap. Ask us if the instrument and sender (usually a bank) will be acceptable for your project’s required funding. Sometimes our simple Commercial Promissory Note with a bank’s endorsement, known as an “aval” (AvPN) can also work, as would a top-rated ISIN-registered corporate bond.

            The sponsor’s main contribution is a completion assurance guarantee or partial (leveraged) guarantee, in exchange for which they either receive a benefit to be negotiated — sometimes a modest equity stake, and/or (if providing fee-based products or services to the project) an enhanced fee — with the certainty that if they deliver the guarantee on behalf of the project, they will be paid in a timely manner, as the funding for the project itself (via scheduled deposits into the SPV’s bank account) thus becomes guaranteed.

            Sponsors can be reimbursed for their “margin” (costs associated with obtaining the Bank Guarantee or Standby Letter of Credit) at the beginning of the draw period.

      1. This is In3 Capital Partner’s contractual mechanism for risk sharing with the project company and equity partners. It opens up additional, often quite attractive and advantageous options for project capital above US$25 million. Sponsors are used primarily when seeking debt capital from private or institutional lenders as a form of credit enhancement, but some private lenders (including our family office partners) use them as a form of construction risk mitigation and bank collateral used only until project completion. This is the case with In3’s flagship Completion Assurance Program.

1. 1. The advantage here is that illiquid developers without sufficient assets on their balance sheet can leverage a completion assurance guarantee rather than providing a direct cash investment in their own project. This approach serves as capital preservation strategy, which can often be a maker/breaker for ambitious projects in the US, EU and developing countries.

1. 1. Ask us for details or sample contractual language to assist with proposing this to firms you are interviewing. Best practice includes developing a short list of candidate EPC / GC firms, avoiding the “one-horse race” of a captive firm until reaching financial closing. Although not required, our capital partners do appreciate being involved in this critically important decision.

2. What does the Completion Assurance guarantee cover? What purpose does it serve here? Why does In3’s funding partner need one? How do I obtain one?

Answer: It is a bit innovative to use a “completion assurance” guarantee (definition) for mid-market project financing in this way, and we offer this because a) the funding partner requires it to offer favorable terms and streamlined due diligence, b) it delivers mutual advantages. These advantages have proven to be game-changing for an important subset of the overall mid-market project finance space — for instance, those seeking up to 100% financing that sometimes are not completely shovel-ready (more on the set of problems CAP funding solves), often without the ability to provide any up-front cash as a security deposit or owner equity “skin in the game.” The current market conditions make 100% financing increasingly rare, with tightening bankability/underwriting standards.

But not with CAP! Our family office partners tap their own pre-established lines of commercial credit, alongside added cash resources (making up for the gap between the value of the guarantee and the total amount of delivered funding) for each investment, whether the client happens to prefer debt, equity or both.

Most bankers and other professionals have an automatic association with what guarantees are for and how they “should” be used. This is why it is important to learn as much as possible before deciding on next steps. With CAP, the guarantee itself provides surety, security or assurance (giving rise to confidence, not as a form of insurance) in project completion, commissioning, and the start of commercial operations, reaching an important milestone known as Commercial Operation Date or COD. Issued with a specific expiration date, typically on an annual basis (365+1 days minimum) and renewable until COD, such completion assurance protects both the developer and the capital provider, ensuring that the project gets delivered, that the assets are properly built and brought through commissioning to begin commercial operations.

This provides accountability by the developer (and, in turn, their hired contractors) per the terms and conditions of the project’s Loan Agreement. It effectively filters out fraud and avoids various forms of misconduct or malfeasance. In other words, used this way, such financial guarantees are a form of short-term assurance (during just the pre-construction and construction periods, until COD, typically, for Bank Guarantees and Avalized Promissory Notes; compare) that yield long-term benefits from an operating project, funded quickly and at favorable terms. This conveys confidence to the funder that the involved parties will work together to deliver the project, and also serves as temporary credit enhancement for the developer (only until the start of commercial operations), enabling better terms and easier, more predictable and rapid closings.

To be clear, the requested Financial Guarantee is not …

1. 1. • A traditional (used for trade of commodities or other security) Demand Guarantee (DG), Bank Guarantee (BG) or Letter of Credit (LC) that will be used or cashed upon completion of the transaction. Instead, it is linked to a loan contract and only used as assurance that the developer upholds their agreements, until project completion, so that it expires upon “maturity” following project COD. It won’t get used (called or cashed) so long as the developer and their contractors do their part. With lengthy cure periods for any violation of the loan agreement terms or covenants, it effectively filters out fraud. Only if the developer abandons the project, or steals the funding instead of building the project, is there such consequence that would pull on the completion assurance guarantee. These remote circumstances can also be guarded against via securitizing the transaction for the guarantor, such as via a side agreement, offer of a lien (in case the developer opts out), or other measures. See below regarding “When can it be called?“
      • Nor is it an insurance product of any kind. No insurance product constitutes a financial guarantee, required by Capital Partners’ funding bank (for more on this, see Success Tip 5.2, “What about insurance as a completion assurance guarantee?”). Insurance policies such as for completion bonds or performance wraps, pricing floors, currency hedging, or insurance against other hazards like political risks, government interference, etc., have their uses, and developers may want to obtain such coverage for their own protection.
        Note that In3 can originate political risk insurance policies for our clients (more) and developers may wish to obtain such coverage or EPC / construction firm performance/payment/completion bonds, but CAP funding does not require such insurance.

See Success Tip #5 for more practical suggestions on obtaining a completion assurance guarantee.

We realize there are often challenges (delays or unanticipated issues, setbacks, etc.) with almost any new construction project. Here the requested guarantee ensures that the challenges are addressed and resolved in a cooperative manner. It aligns all parties on the single-minded goal of bringing the project assets to begin commercial operations. It filters out fraud and other misconduct. Once this funding has been arranged, the guarantee is only a factor if there was uncured breach of contract, gross negligence, fraud, or other forms of “malfeasance”.

Using international demand guarantee rules (URDG 758), following the “cure period” (good faith, cooperative problem-solving) it is actually quite difficult for us to call the guarantee. In that sense, we are using it to protect everyone’s interests, discouraging anyone who would later prove to be fraudulent or criminally “unreliable”, to benefit those who are legitimate through more attractive funding terms, streamlined conditions and faster closings.

Which type of guarantee best fits your needs? More (In3 Finance comparison and steps to take)

To expand on the above points, see Question 5, below “How can the guarantee be used?” or Question 6, “What reassurance is there that the guarantee, once sent, will not be misused, called or cashed in?” Otherwise, get started.

3. Where does the money (our partner’s investment capital) come from? Is it “guaranteed” as well? Funding terms & conditions?

Answer: The financing comes from private, we say “in-house,” US-based single family offices. The name and location of this partner will be disclosed under NCNDA and/or once there is suitable proof of a qualifying project delivered to us. We appreciate the need for KYC (know your customer, or in this case, KY investor), which goes both ways. More on KYC and how we embed mutual safety checkpoints here.

We are the FO’s authorized agents worldwide, with the authority to provide indicative terms, screen, pre-qualify and provide vetting services (pre-due diligence) for incoming projects. References available upon request, but again, this goes both ways. It is customary to provide “bone fides” in increments as each party builds their mutual Know Your Customer (KYC) profiles toward a verifiable business transaction. All information exchanged is on a mutual “needs to know” basis.

Important to note that we do not ask for any commitments from the guarantor ahead of getting under contract for the funding. We help clients (whether via Affiliates or direct) prepare for due diligence via our Six Essentials (complete steps here) pre-qualification process. Due diligence is launched upon receipt of a guarantee with acceptable verbiage, draw schedule and a verifiable RWA letter, which takes 2-4 weeks, typically.

Is the funding “guaranteed”? Yes, once we reach financial closing, the funding is effectively locked down per a schedule of per-approved monthly drawdowns. These transfers are automatic (scheduled) by the funding bank for the full allocation of funding. A Loan Agreement will be negotiated and signed to govern the proscribed draw schedule and all obligations on behalf of both parties.

What are the funding terms & conditions? Indicative terms here. Basic conditions here. The only term that is typically negotiated is our equity carried interest (as reflected in a separate Share Purchase Agreement, issued/offered upon completion of due diligence), which is directly tied to the size and quality of the completion assurance guarantee.

4. How do invested/loaned funds get paid out?

Answer: They get transferred to the Special Purpose Vehicle’s bank account per the established draw schedule, then disbursed to the various vendors and other companies or individuals to cover procurement expenses or other costs as defined in the Uses of Funds statement.

In some cases, for certain projects, we may instead arrange to pay vendors directly. This is unusual and would be agreed to in advance.

To pre-approve the project’s funding plan, summarize the Total Project Costs (more) in a table with breakdown of major expenditure categories as well as a monthly proposed draw schedule, which strives to keep each month a consistent amount, but in practice, the draws are based on the cash requirements of the critical-path milestones of the project.

5. How can the completion assurance guarantee (BG/SbLC or AvPN) be used?

Answer: The receiving bank — usually the source of a funded project’s debt capital — keeps the BG/SbLC as security during construction, until the project completes commissioning and reaches Commercial Operation Date (COD), then the instrument is released upon “maturity” (technically, it is allowed to expire). The same mechanism applies to an Avalized Promissory Note (AvPN) issued by the project company or sponsor — the instrument remains in effect (“operative”) until COD, and then expires and falls away.

The terms and conditions for the use of the completion assurance guarantee are defined in a Loan Agreement that will prepared and signed, and available for inspection, before the BG/SbLC or AvPN hardcopy is sent. It would be unethical and improper to ask for the guarantee instrument ahead of mutually agreed-upon funding contracts. Only once all parties negotiate/agree and sign the funding agreement, which is what constitutes financial closing, would the guarantee be received by one of our partner’s banks in order to begin drawing down the project’s funds, with first draw within 30-45 days following financial closing.

6. What reassurance is there that the guarantee, once sent, will not be misused, called or cashed in?

Answer: First, these instruments are transferable, as required by the Uniform Rules for Demand Guarantees (ICC publication 758), so that it can be sent from the issuing bank to the investor/lender’s bank. The BG/SbLC or AvPN would not be transferred away to anyone else because then In3’s partners would no longer have it. Simple.

A bit more complex is what could cause the instrument to be called? Short answer: the instrument is callable (and if it was not callable, it would not constitute a proper financial guarantee), but it would only be called in the event of uncured breach of contract. If the Developer upholds the covenants, terms and conditions (T’s & C’s) of the Loan Agreement, there will be no issue. The overarching purpose is to provide security that assures or ensures completion of the project’s assets. You will be invited to review and consent to a full disclosure of all these T’s & C’s before anyone is asked to issue the actual guarantee instrument.

In practice, problems that arise during the draw period are always worked out in a cooperative manner so that the BG/SbLC remains in force (an “operative instrument,”) and so that nobody calls the guarantee, or calls off the project(s). To do so, after all the arrangements have been made, would be paramount to a disaster, where — by contrast, the true intent of all this — the upside benefit of completing and operating the project, organized to generate long-term cashflows and often social/environment value, is incomparable.

To call a completion assurance guarantee would be an absolute last resort, and would be reserved for situations where there is no solution (no “fix” or cure available) to deal with fraud, malfeasance, or other “incurable” non-compliance with the T’s & C’s of the Loan Agreement. It really must not happen, and has not happened even once in history. Working together in an open and cooperative manner ensures that new project construction and commissioning will stay on track to reach Commercial Operation Date (COD).

In a way, with this approach to funding projects, the objective becomes making sure the Developer and, in turn, the contractors or subcontractors, do not their breach their respective agreements. It is an incentive to work together to resolve whatever issues crop up. Note that it is also common for the EPC/general contractor to carry insurance in the form of a performance/completion bonds, another layer of protection for the developer, even though the capital (funding bank) cannot accept an insurance in lieu of a financial guarantee.

See Question 7 for what constitutes an uncured breach that could result in a claim against the guarantee.

7. Under what circumstances could the guarantee be called, drawn or cashed?

Answer: Uncured breach of contract (loan agreement) by the developer. The proposed loan agreement will be put on the table following our due diligence, which will spell this out in the proper context. WE DO NOT EXPECT A COMMITMENT FROM ANY GUARANTOR UNTIL THIS CONTRACT HAS BEEN PROPERLY REVIEWED AND ENTERED.

It is important to understand the business context and rationale for why we would never call an issued BG/SbLC or AvPN, arbitrarily or otherwise; in fact, calling/cashing/drawing on an issued instrument must be avoided. We can’t call it except when there is an iron-clad case of fraud, as the courts would need to decide, as they have been quite consistent over the long history of these rules, URDG ICC 758. Making any claim would be a strong negative reflection on all parties, including In3. In practice, we would not call it, and the parties must simply work together to complete the project (or a similar project, or at a different site …) no matter what.

What constitutes an “incurable” breach? Essentially, it comes down to four areas, namely

(1) Gross Default (the developer closes shop, leaves town, leaves no forwarding address …),

(2) Gross misrepresentation and fraud (the warranty section of the Loan Agreement defines this in greater detail),

(3) Misuse or misappropriation of funds, where the documented Uses of Proceeds defines the correct and proper allocations, or

(4) If the instrument expires (bank guarantees or AvPNs are issued with an expiration or maturity date) before the project assets are completed and commissioned. This last one is easily fixed/prevented: renew the BG/SbLC or AvPN as needed until COD.

To be clear, the BG/SbLC, SG or AvPN must not be called – that’s an outcome we must make sure we all avoid, as (worth emphasis) it would reflect negatively on all of us, including the Family Office, In3, and the developer/sponsor(s) in the eyes of our respective banks. In other words, breach of contract by the developer is a worst case scenario that applies only if the project loan agreement’s T’s & C’s are violated, following a substantial cure period, which is akin to a complete breakdown of good will and cooperation, where we would have no choice but to call the instrument (fraud/theft) to make up for a material loss, effectively putting the case into the court system. The burden of proof would be on the family office to show there was uncured material breach. The Uniform Rules for Demand Guarantees (URDG ICC 758) are well-proven as reported by independent legal counsel Reed Smith; see URDG 758 – A facelift for the Demand Guarantee Rules.

The point is that the guarantee will not be called arbitrarily or at all — that would be both illegal and a waste of time. In fact, it is quite difficult to prove incurable breach of contract such that a legitimate claim could be made under URDG 758. Thus, such completion assurance guarantees serve as surety that the parties will work through any issues. More on these “demand guarantee” technicalities.

Lastly, note an important subtlety: a BG/SbLC or AvPN could only be called/cashed/drawn up to the extent of funds transferred at that point. If the instrument has just been issued, for example, but no loan/investment funds have yet to be transferred against it, the instrument effectively has no monetary value at that point, and thus it makes no sense for it to be called. There is, in effect, no demand guarantee operating until funds are transferred against it. And if no funds are transferred, and the entire funding arrangement were to be canceled, the BG/SbLC or Promissory Note can be taken back or “unwound” without material consequence.

We cannot imagine a reason why anyone would want to do this, having come all that way, ignoring the upside business value of completing an operating project, but we have found this explanation is sometimes key to understanding the fundamental tenants of the proposed business arrangement.

Does this logic help you appreciated how this model is actually quite low-risk and safe for all parties? See also, Why CAP [formerly CGP] and How It Works “explainer video” if you wish to have a visual depiction. We are striving to show how everyone who uses this approach with basic honesty, and non-fraudulent intentions, will be protected. We know from experience that this model is reasonably low risk, and our track record shows it does work out well for all parties.

8. What are the key differences and similarities between the various completion assurance guarantee options? Which one should we use?

Answer: It depends on a few factors like creditworthiness, if you have access to assets or people who do. If working in a country that still issues Sovereign Guarantees (SG), that’s the least cost option, next best is to have a supporting government agency ask a bank to issue a Bank Guarantee/Standby Letter of Credit (BG/SbLC).

Without government sponsorship, and if short of assets, gaining a sponsor for a BG/SbLC or our recently-introduced Promissory Note with Bank Aval is your next best option. Comparison of the available pathways plus stepwise instruments here or below:

To decide which instrument to use for your situation, compare the relative costs and advantages: helpful article.

9. (a) Why does CAP funding require a guarantee in the first place? (b) Why not lump sum drawdown?

Answer a): In3’s family office funding partner has long-established relationships with multiple banks where we have built up lines of commercial credit — sometimes called a “credit facility” — that will be leveraged, alongside cash holdings as equity carried interest, where the respective amounts of debt-to-equity depend on several factors, but mainly relies on the face value of the Completion Assurance Guarantee (CAG) put on the table and project profitability (measured as unlevered IRR). The funder established these credit facilities to build their own large-scale projects decades ago, so to make this capital available to In3 client projects, the bank relationship managers expect us to offset at least some of the risk of non-completion using a CAG.

Answer b): This structure also explains why the funds are delivered in monthly drawdowns, not a lump sum. When funding In3 client’s construction projects, a monthly drawdown schedule further ensures the involved bank that funds will be allocated and used per the terms of the funding agreement(s), which offers an additional layer of protection against fraud. Monthly draws accommodate critical-path construction milestones and cashflow requirements using consistent (the same amount each month) or increasing monthly amounts as construction activities ramp up. Together, this structure effectively filters out non-completion risk and fraud enabling better terms, more predictable and faster closings.

Still have questions? We’ve got more answers, no doubt. All FAQs

Further “how to” tips and advice:

* How to obtain a suitable completion guarantee?

* How to obtain a completion assurance guarantee sponsor (stepwise instruction)

* What about insurance products like performance/completion bonds? (Short answer: insurance products do not constitute a financial guarantee.)

Take heed of our full “Resource Center” library for further background materials, then our Proposal Builder “kit”, which includes all the various MS Word templates for the qualifying completion assurance guarantees, bank letters and a pre-qualification worksheet to get started. Or contact us if still necessary.

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