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Comparing Bank, Company and Sovereign Guarantees
Four options for suitable Financial Guarantees (definition, in contrast to a traditional Loan Guarantee), ranked by ease and practicality.
Option 1: Standby Letter of Credit (SbLC or SLOC verbiage essentials). This is the main type of instrument — by far most widely used.
Option 2: Cash down of ~25-35% or more eliminates the need for a bank-involved guarantee. Is that right for you? Some companies do not want to work with bankers while others do not want to move cash. Compare the above 3 options — the main ways of satisfying In3CAP security
Option 3: Alternative types of bank-involved guarantees are used less often, but may be preferable in certain situations:
- For countries able to issue a Sovereign Guarantee (SG) from the country’s Ministry of Finance or mandated alternative agency, this requires bank confirmation (know more about SGs).
- Bank Guarantee (BG) or Performance Guarantee (PG), so long as it largely conforms to the same wording as shown in In3’s SbLC template; still uses an RWA letter and/or Authorization to Verify (ATV) letter.
- Bank-endorsed or stamped (with “per aval”) Avalized Promissory Note (AvPN) using our templates for both the PN and an RWA letter. Avals are most common in Europe and parts of the developing world. Know more about AvPNs. This type of note is issued by a private company, and is very simple (one page, back-to-back) with an endorsing bank as secondary guarantor, which only works if the issuer is seen as creditworthy by the avalizing bank. Collateral assets will still be needed if otherwise.
Option 4: Direct use of Tangible Assets; see complete list of seven types. The first 4 assets usually require professional appraisal and/or chain of custody records and can serve as backing for a Standby Letter of Credit (SbLC). Ask a banker that is most familiar with the asset owner’s financial situation.
The last three asset types – Bonds, MTNs, or gold – do not require a bank-involved SbLC, and can be leveraged directly as security for 100% CAP funding, and although less valuable relative to the other options, can bypass some of the issues with SbLC wording/SWIFT, which can help expedite in some situations:
- Medium-Term Notes (MTNs) have long been a reliable method for raising capital, particularly for established companies or in cooperation with those with financial depth (what we can “sponsors”). MTNs are flexible, often cost-effective (especially so compare to traditional financing methods), and can come from diverse sponsors, solving the challenge of bringing the necessary security for CAP’s favorable terms.
- ISIN-registered and top-rated bonds, corporate or government bonds, such as US Treasuries, relying on strong credit rating of the issuer. This is a securities instrument, not a “bond” in the sense of an insurance product. Many other options exist with securities and financial instruments, such as “hypothecating” public equities (stock) backing an SbLC.
- Gold with Safe Keeping Record (SKR).
The advantage of these three asset types, when available, is that they allow you to secure CAP funding without having to learn the intricacies of SbLCs, nor would you need to involve an In3 Affiliate or DFY service for the qualifying guarantee, allowing developers to mainly focus on their core business activities.
When is the CAP security released?
All CAP guarantees, except a government’s SG, are used just until project completion — technically, they’re in place until the project reaches Commercial Operation Date (COD) and is then allowed to expire on its maturity date. Cash deposit is held, and bears interest (earned by the party that provides the cash, typically) until the final drawdown of funds. Compare CAP guarantee to cash deposit options.
Which option is best for your situation?
What assets or sponsor assets are within reach? This is the best place to start. Whatever can be accessed and used for the funding you require is usually the right answer. Tips to know more.
What are the relative tradeoffs and requirements for these?
Here’s a summary to help you decide whether to use a Standby Letter of Credit, one of the above-mentioned Securities or a Cash Deposit would be best.
Click chart above for a list of asset types that can be used as collateral, either as requested by a bank or directly.
If a Sovereign nation’s Guarantee (SG) happens to be available from the Ministry of Finance, that is also an excellent approach, though SGs have become increasingly restricted in the post-Covid global economy. SGs do solve the issue of a base of collateral to make the guarantee or direct deposit feasible. They’re effectively free to the private-sector developers.
Role of a Sponsor: With an SG, the government’s treasury is the sponsor. Otherwise, a sponsoring Company or individual could provide either securities (an MTN, rated Bond or Gold with rated SKR), or an SbLC or BG, or even a simple Commercial Promissory Note with a bank’s Aval (AvPN). There are many similarities, but also a few key differences between guarantee types, shown below:
Comparing Bank, Corporate and Sovereign Nation Guarantees for In3 funding (click chart to enlarge) 
Why use a project finance Completion Assurance Guarantee at all? (article)
When CAP funding’s guarantee is your best or only option (seven circumstances)
The rest of this article walks through the top-down approach to save time and ease decision-making
How to obtain a Financial Guarantee or Partial Guarantee
NOTE: If you are effectively out of cash, working in a developing country or emerging economy and already have access, or can gain access, to the host government’s Minister of Finance (MoF), and that country still issues Sovereign Guarantees (SGs), best to explore that option first, as SGs are effectively free to developers. See Option #3, below.
If you can afford to hire In3 Group to assist you, please read about this premium service here.
Option 1A) If you are part of an established, credit-worthy company, or can involve such a company, ask a rated bank to issue a Bank Guarantee or Standby Letter of Credit (BG/SbLC) using our template.
Note that an SbLC or BG is considered “cash backed” via any of the listed assets, including the following examples:
- Public Equities — shares of stock that are publicly traded, though they do not need to be sold to serve as a guarantee. If they were sold (perhaps for other reasons) the cash proceeds could be used as a direct deposit.
- Similarly, a Bank Line of Credit, bridge loan or other short-term debt instrument can be used by the bank or briefly drawn as cash for a direct deposit, where cash has more value relative to an SbLC
- ISIN-registered and rated Corporate or Government Bonds – can be used for direct deposit without a bank-provided SWIFT or SbLC / BG / AvPN / SG.
- Gold with SKR … same as Bonds
- Land Holdings — appraised and insured, typically. Ask your banker … this depends on perception of value to the bank.
- Corporate Balance Sheet — in lieu of assets, some bankers will appreciate that a client of theirs has adequate financial depths such that a specific pledge of collateral is not needed.
- Minerals, Precious Metals (other than gold, mentioned above), Gems, Artwork, or others with chain of custody and recent appraisal.
The phrase “cash-backed” is a misnomer. Well-established customers may only need to refer to the company’s assets on their balance sheet, not actual cash on deposit. Explain to your banker(s) the purpose of this guarantee (project completion assurance via an innovative structure), then once you are sure they understand this, request a cost quotation and delivery terms for their BG or SbLC based on our requirements (using well-proven Uniform Rules for Demand Guarantees, ICC publication 758, ideally). What security are they are willing to accept to issue the instrument? The involved bank will honor the BG/SbLC according only to the verbiage (wording), and commercial terms of the undertaking, which is not related to its underlying security.
Fraud Alert: Avoid most SbLC/BG “trading platforms” (too few have earned a verifiable reputation for delivering value) and also avoid those who claim to offer BG/SbLC “leasing.” In general, they often work with blacklisted banks that use various techniques to defraud the naïve or vulnerable. Search the FBI’s Internet Crime Complaint Center (example of fraud with SbLC) or if you subscribe to LinkedIn, use our Affiliate’s Scam Alert group here.
Once a draft instrument is obtained and sent to us, we can then quickly review/approve that bank’s BG/SbLC verbiage along with the other project essentials.
How? Download and fill in the basic facts using In3’s MS Word BG/SBLC template to ask your bank to add their contact information, and what they will charge (to be sent via MT-760 SWIFT) and to gain our acceptance to any verbiage revisions. Bank’s usually prefer to use their own format, but the legal venue (URDG ICC 758, for example) determines what verbiage will be used.
Once there is a satisfactory arrangement (no need to sign the BG/SBLC at this time), then send the draft verbiage to us for next steps. Tips on the essential elements of instrument verbiage here.
Option 1B) Obtain a Financial Guarantee “Sponsor” / Backer / Lender
If instead you are an individual, or have no operating history or access to assets your selected bank will accept, you will want to align incentives with a “sponsor” (definition).
How? Consider potential sponsors that would have an interest in the project such that they could be willing, if properly approached and incentivized, to issue an enabling guarantee. Financial guarantee sponsorship via a well-established vendor, stakeholder or like-minded (mission-aligned) “third party” is our #1 success strategy for clients that lack financial depth on their own.
Such backing is most commonly obtained via a well-established (but not necessarily the largest) EPC firm, general contractor, OEM, integrator, or other vendor, that stands to benefit from receiving the contract from the developer, offering an inherent incentive for agreeing to bring forward a financial guarantee. The project’s developer can skillfully raise this point as part of contract negotiations, being careful not to overpromise (at first, do not tell the contractor/vendor they have secured their contract) until this completion surety arrangement can be confirmed.
Step-by-step guidance to gain a financial (completion assurance) guarantee sponsor
Two subtle and important distinctions about this request — PLEASE READ:
- This financial Completion Assurance guarantee is unlike a traditional loan guarantee (used as credit enhancement for the borrower, as it stays in place during the life of the loan) because, in this case, the purpose is to ensure project completion and commissioning — it goes away once the project reaches Commercial Operation Date (COD), at which time the guarantee is allowed to expire.
- Most EPC and construction firms already provide completion bonding (or other insurance), making it important to help them understand and appreciate their upside benefit from playing this expanded role. You may need to offer them an enhanced fee or other incentive to bring adequate BG/SbLC or AvPN coverage.
Would you like to receive sample contractual language or presentation materials to share with a potential sponsor? If so, request our redacted EPC agreement with the paragraph that covers the guarantee and/or our “EPC/GC/OEM briefing” PowerPoint presentation materials. History shows this communication is tricky, fraught with preconceptions that require a bit of preparation and skill to turn in direction of mutual understanding. Is there someone on your team with the patience and persistence to do this properly?
If not, please consider involving one of In3’s Master Affiliates, all of whom have a track record of success getting sponsors on board. The total cost of financing will not increase substantially with an Affiliate on board, but the odds of success go up immeasurably.
Your team will need to tailor key information to fit with your unique project opportunity and/or co-brand the appropriate slides with In3, to define these and other points precisely.
Sidebar: If, along the way to achieving this goal (a usable BG/SbLC for your project to unlock this advantageous funding), you happen to encounter any of the three challenges listed here, namely (1) No available guarantor has sufficient asset depth for an acceptable pledge of collateral nor capacity to cover the bank’s guarantee fee, (2) What we call “Confused Banker Syndrome“, or (3) The project size is such that the quoted cost of the instrument exceed available cash-on-hand — though most such fees are only a modest influence on the overall cost-of-capital when amortized over the life of the project — then and only then consider the AvPN, Option 2, as a backup plan.
Option 2) In lieu of a BG/SbLC, creditworthy companies can use our Avalized Promissory Note (AvPN)
AvPNs are a relatively new option, so please be advised that, although we are certain that our own bank(s) will accept an AvPN for project funding, we have limited experience with how banks will interpret their responsibility with this request to provide an Aval. The likely advantage, per initial offers made to several In3 clients, show they are effectively free to qualified customers. Just a nominal fee to the party asking for the Aval, assuming that party is reasonably creditworthy and in good standing with their bank. For more on this, see sidebar, below.
How? Download and fill in the In3’s MS Word templates for PN verbiage and RWA Letter and discuss the filled-in but unsigned drafts with your bank or the sponsor’s bank (all templates are available for download toward the top of CAP proposal builder). Then send to us for feedback and next steps.
Sidebar: What do banks charge for an Aval or “stamp” on this simple Promissory Note? So far, bank fees for an aval are substantially less than an equivalent BG/SBLC (in some cases, no fee at all), but the bank’s interpretation of their role and responsibility with providing the Aval may get in the way. Especially with new customers of the bank, if often brings up whether the company issuing the PN is reasonably creditworthy. Of course, the purpose of these guarantee instruments is credit enhancement as well as serving as a completion/performance guarantee (until Commercial Operation Date), so this is a normal part of gaining an issuing bank’s cooperation. Start by asking the bank that will see this request coming from a trustworthy customer. Even though the company issues this PN, not the bank, the bank’s exact legal exposure is less cut-and-dry. Is the aval simply a statement that their customer is in good standing or are they co-signing for the guarantee in the event of default? This is somewhat arbitrary (a matter of the banker’s opinion, geared toward who is asking), so we recommend that you present the bone fides of the company — audited financial statements, if available — get get their proper reaction and cost quotation.
Please let us know what you learn when you ask a bank to “avalize” (stamp) our simple (1-page) Commercial Promissory Note.
Option 3) Involve a Sovereign government’s Guarantee (SG).
How? If an SG may be within reach from the government’s Ministry of Finance (or authorized/mandated alternative agent that ties back to the country’s national treasury) then download and fill in the appropriate MS Word templates for SG verbiage and Verification Letter, even if initially unsigned, then send to us for next steps.
SGs do sometimes get caught up in politics, and are increasingly rare in this time of COVID. If the government supports the project(s) you wish to finance, but there is no Ministry of Finance SG available, consider Option 1B, above, where the “sponsor” is the government itself. See Sidebar:
Sidebar: When there’s government support for proposed projects, but issues with MoF authority to issue the required guarantee, an alternative to the SG is to ask the MoF to direct a bank to issue a BG/SbLC or Avalize In3’s simplified Promissory Note (AvPN) instead, the previous two options, above. This results in the government’s backing of the project (whether or not a formal public-private partnership), using its good faith and credit in the eyes of the issuing or avalizing bank, bypassing politics, IMF restrictions, or a host of other roadblocks that governments sometimes encounter.
No access to the MoF, working in a country that can’t issue an SG, or working with projects that the government won’t sponsor? No problem! Find a different sponsor.
Option 4) New Option: ISIN Bonds
In order to use an ISIN-registered Corporate Bond, a company’s securities must be BBB-rated or higher, based on its 12-digit International Securities Identification Number (ISIN) code, used to discover the form, units, depositary receipts, rights, warrants, and currencies. If this type of corporate bond is available for use as a guarantee, please contact In3 with the ISIN code and bond rating.
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