Bank-endorsed Promissory Note delivers certain advantages to well-qualified project developers and sponsors
Although rarely used, the main advantage of using our Avalized commercial Promissory Note (In3’s PNs are simple, 1-page, company-issued guarantees):
- Clean start: Some bankers get confused by the versatility (and occasional fraud) of the BG/SbLC, as they are often used for commodity trade finance transactions, which function quite differently from a guarantee used for project finance security. Further, AvPNs are bank-endorsed guarantees, unlike the widely-used Standby Letter of Credit (SbLC), which is a bank-issued guarantee, similar to a Bank Guarantee (BG). Banks are often reluctant to issue their guarantee for a variety of reasons (mainly, not wanting to make a mistake), especially at first, while for those that understand what it means under the ICC rules (URDG 758), an Aval will have none of that baggage.
But that said, an “Aval” is not widely understood (usually only bankers outside of N. America), so be sure to ask if your bank can provide one. - No SWIFT fee for the AvPN instrument may save 0.25%-3% of the face value. Finance-related fees are reimbursed from initial draw(s) of project funding, but that still usually requires some party — typically the project’s developer, sponsor or other stakeholder — to cover or “bridge” the fee until 30-45 days after closing, the typical timeframe to first draw. In some cases, we can make these arrangements after all else is confirmed.
But generally, if the party asking for the Aval is creditworthy in the eyes of the bank, the AvPN will cost less than a Standby Letter of Credit / Bank Guarantee (SbLC/BG) to qualifying customers. The rationale here is that a company-issued commercial Promissory Note relies on the credit rating of the company offering the guarantee, or on their balance sheet and operating history (which would usually require financial statements or other evidence the bank will accept), and overall standing with the bank. Banks usually require separate collateral for a Bank’s SbLC, Performance Guarantee, or Payment Guarantee, but the bank that provides the Aval may or may not ask for collateral, given their secondary guarantor role. It just depends. You would need to ask.
There is one significant trade-off, however: a Promissory Note (PN) with a bank’s “Aval” or stamp is not widely understood. If you are certain your bank can provide the Aval, this will bring up whether the party requesting it is creditworthy in their eyes.
Most banks do not charge customers for an Aval; some charge a nominal service fee (similar to a notary or other services). This is because the bank is not taking primary responsibility for the guarantee and has reason to believe the issuer will not default. The PN issuer is usually a private company, and the bank’s customer, while the bank takes secondary responsibility by stamping the PN hardcopy “per Aval”. This confirms that the issuer of the PN is in good standing with the bank and reasonably creditworthy.
If that is not the case, the bank will either not agree to provide the aval at all, or would request some form of collateral. If the banks seeks a higher fee, ask them why. Compare that to a BG/SbLC/PG SWIFT fee, or ask a different bank (with equal or better credit rating), and go with the instrument that’s least expensive.
Part of the reason this instrument is not well understood by bankers is that it is a company-issued guarantee (sometimes called a corporate warranty, in the form of a commercial Promissory Note), NOT from the bank. There is no SWIFT message to transmit the instrument, so they cannot charge a SWIFT fee for that — the instrument is physically stamped and then sent via hardcopy only, with SWIFT used only to confirm or otherwise correspond on a bank-to-bank basis. An RWA letter from the bank’s officer expresses the bank’s intent will be followed by bank-to-bank confirmation.
To be clear, although usually less expensive, with none of the baggage of a BG/SbLC, avalizing a Promissory Note does not make the issuer more creditworthy. The aval does not enhance the issuer’s credit. Still, our partner’s funding banks will accept this instrument once the developer project/portfolio is otherwise pre-qualified for our fast and advantageous funding.
PNs with Aval and SbLC/BGs can use Uniform Rules for Demand Guarantees (URDG), ICC pub 758. There are other similarities as well. Compare both types of instruments below or with decision-making support here.
What reassures the bank we will not call the AvPN? Making any claims against the instrument (drawing on or calling the AvPN) remains the absolute last resort. We have never called a guarantee in all of our history and do not intend to start now. Doing so would be a sharply negative reflection upon everyone involved … would end up in the courts. It must not happen, and in practice, there would be no reason to call it.
To recap, the essential requirement is that the involved bank offers Avals and that the PN issuer asking for the Aval must be a valid customer of the bank usually with long-established banking relations. To be blunt about it, if the issuing party is used to being supported by their bank in multi-million-dollar transactions, that can help leverage project financing with an AvPN or SbLC for the current and future transactions. The difference with CAP is that we only seek completion assurance — the guarantee is allowed to expire once the project reaches Commercial Operation Date (COD).
Note: Be careful not to pivot too soon to an AvPN without giving adequate attention to the SbLC, SG, or direct deposit (either ISIN-registered and rated bond, MTNs, gold with SKR, or cash) options. The grass always seems greener … some banks will not know precisely what you are asking (even if they pretend to) or will simply say “no” to an AvPN, at first, to avoid having to think, or in hopes of saving both parties frustration. Start here, but do not accept the first no; instead gain precise facts (not interpretations), and inform yourself of why they are objecting, even if they won’t tell you directly at first. Persistence often pays off.
But if the PN issuer is not known to be sufficiently creditworthy, the bankers will assume a default event is possible that would leave them hanging. The reasons mentioned above sometimes affect banker cooperation even when the PN issuer is reasonably creditworthy. This undertaking is more secure than many bankers realize. Staying in this conversation, showing poised, calm and persistent assertiveness (pushing too hard can appear to them as desperation, even if it is entirely born of confidence) will tend to win management support, even if the first “no” is simply a knee-jerk reaction. Once the bank agrees to this, requests for subsequent projects go much more smoothly.
For more on this topic: