Quick Guide to CAP funding Guarantees: How to Obtain One
What it is? A Completion Assurance Guarantee (CAG) is a financial guarantee mainly in the form of a bank’s Standby Letter of Credit (SbLC), sent via SWIFT, which stays in place as security until project delivery.
Project delivery means all the funding has been received and the project has been completed to the best of the development team’s ability, whether or not on time and within budget, to the satisfaction of the authority with jurisdiction (commissioned to begin commercial operations).
Our private Family Office partner is effectively the developer of record in the eyes of the funding bank, and this requirement allows easier access to project funding, up to 100% of the budget, at virtually any stage of readiness, thanks to this in-house funder’s long-standing role and reputation (and solid credit rating) delivering diverse projects. There are mutual protections making this practical (more).
CAGs can be leveraged — they’re not 1:1 with the required funding. CAP funding’s unique model solves a set of notorious problems with securing project finance, especially when the developer is out of cash or has limited “skin in the game”. CAGs sit for 1-2 years, typically, until the project reaches Commercial Operation Date (COD), then it is allowed to expire.
How to start: Propose an SbLC based on our wording template with any of these assets used as collateral (or without collateral, with sufficient balance sheet strength) for the SbLC-issuing bank, or propose any of the following potentially viable but less common forms:
- As a Sovereign Guarantee (SG) still involve a bank to confirm it – more
- Direct transfer of registered/rated Bonds, Medium-term Notes (MTNs) or Gold with Safe Keeping Record (SKR) — no SWIFT needed (compare & decide)
- Avalized Promissory Note (AvPN), where a bank “stamps” and endorses it (URDG 758 only), hardcopy only (no SWIFT)
- Bank Guarantee, Performance Guarantee or Payment Guarantee (BG/PG) if it uses the SbLC wording.
All of the above are CAG alternative forms — instead of an SbLC, which is by far the most widely used — with further practical tips on how to obtain and use them shown below.
What is the CAG used for? We offer flexible, mid-market “impact” project capital using an innovative structure. Compared to the traditional route, CAP funding has strong advantages, such as streamlined due diligence, less stringent requirements for stage of readiness, or owner cash equity “skin in the game.” This novel approach delivers more predictable and faster closings and first draw of funds. More at Why is Security needed? or When CAP is your best or only option for project finance.
The purpose of the guarantee is as security for project construction and delivery, outlined here in our FAQs. Any of the above assets or securities can be usable as collateral for a CAG; minimums apply.
Summary of asset types that can be used or pledged as collateral for a suitable guarantee.
Simple steps to securing a Completion Assurance Guarantee (CAG)
Is there an alternative to the CAG? Yes, ~25% or more cash can be used as a deposit, which stays in place just until the final monthly draw of funding, at which time it is released in lump sum.
Compare CAGs to Cash Deposit: Most of our clients prefer the SbLC approach as it is asset-backed, instead of moving cash. Some, however, prefer cash or the bond/MTN/gold direct transfer because their bank (or sometimes just the involved bankers) has a hard time understanding or accepting the safety of the SbLC / SG / BG / PG or Aval endorsement. They won’t get fired for saying “no” right away.
SbLC wording that complies with established rules and our partner’s funding bank requirements may seem out of reach, and you might not want to know more about this wording and the intricacies of governing rules, how some bankers assume (incorrectly) that cash must be used as collateral (due to the notorious misnomer/misinterpretation of the phrase “cash backed”), and other guarantee sourcing tips.
When is CAP funding your best (or only) option for project finance?
Getting Started: First step is to simply ask the involved banker — preferably the one that knows the guarantee’s asset owner or agent — for a “specimen” (unsigned) SbLC based on our SbLC template. This saves a lot of time, as we can usually offer a fast yes/no signal and if “no” explain why.
We’re most likely going to accept a proposed SbLC that mirrors our standard verbiage, although there is room for variations in format or layout, so long as the main provisions are included, with nothing extra added that would negate those provisions. See below. If you are not sure, ask your In3 Affiliate or In3’s client relations to review the verbiage once we know and have accepted the proposed project sector, budget, and location.
Further tips:
- In addition to a Standby LC (SbLC), here are some helpful points about the alternative CAG types:
- Bank-confirmed Sovereign Guarantee (SG) from the Finance Ministry. If you are working in a country that can issue an SG, usually without cost, explore that further here.
- Bank Guarantee (BG) if to be used outside the US — BGs are not allowed in the US, which happens to be where our funding bank is based (New York), so only arrange a BG once making sure an SBLC is not going to be available. We would have to work with a subsidiary to fund your project, which we can do. In any case, to be usable, it must largely conform to the same wording as shown in the SbLC template.
- Performance Guarantee or Payment Guarantee (PG), similar to a BG, so long as it largely conforms to the same wording as shown in the SbLC template. A few more details:
- Payment Guarantees can work, but not “Advance Payment Guarantee” (APG), as the latter implies payment before the project’s funding is secured (a conundrum), so that title doesn’t work.
- Blocked Funds can also work, though this usually offers less protection for the issuer, as it is more freely callable.
- Avalized Promissory Note (AvPN) is a bank-endorsed or stamped (with “per aval”) Commerical Promissory Note (PN), with available templates for both the PN and a non-binding RWA letter used to begin the approval process. Best understood by bankers in Europe, the Aval is not as common in North America or other markets.
- Direct (issued by the owner directly to our Family Office’s account in lieu of any of the above guarantee instruments):
- 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 without having to learn the intricacies of SbLCs, allowing developers to mainly focus on their core business activities.
- Gold with Safe Keeping Receipt (SKR) — SKRs are financial documents issued by banks or financial institutions that certify the ownership and safe storage of the assets.
- ISIN-registered and rated bonds whether private/corporate or public, such as US Treasuries (but not a “bond” in the sense of insurance products). The ISIN number must be assigned, but the bond must also be top rated.
Compare and decide which type of CAG is right for your situation
The rest of the article focuses on HOW TO ARRANGE A CAP FUNDING GUARANTEE, starting with a synopsis of what project owners can do to secure their own guarantee, followed by a list of alternative options, whether for individual projects, a series of projects, or an entire portfolio.
SYNOPSIS: For owners/developers or project fundraisers …
- With assets that can be used for a collateral pledge to a bank, or gain the bankers’ endorsement with our alternative guarantee, follow our 3-step process, outlined below, starting with a draft of the proposed instrument, then register your project and upload the basic materials along with any questions.
- For owners/developers that have few or no available assets, the first step in this process serves as a feasibility test — requesting a draft financial instrument such as an SbLC from any bank (be sure the involved bank or provider is legitimate) gets your sponsor’s draft guarantee on the table.
Send the proposed instrument to In3 via Email after making sure your project’s budget and overall purpose are in our wheelhouse. The right bankers on your side, yours or a sponsor’s, will understand your request when you share our template of standardized instrument “verbiage” (wording).
The bigger picture includes just two additional items — so 3 things total — to enable this streamlined pre-qualification:
- A draft guarantee (based on our template), which can be leveraged somewhat, used to assure project completion. This template is standard language for either a “Standby” Letter of Credit (SbLC), or if outside the US, perhaps a Performance Guarantee or Bank Guarantee (BG) is the only option, sent via customary Brussels SWIFT, or one of the others types listed above.
Complete list of Completion Assurance Guarantee options:
- Standby Letter of Credit (SbLC or SLOC) is the most widely used, and much preferred for the best terms.
- In certain countries, a Sovereign Guarantee (SG) from the Ministry of Finance can be issued if the SG can be confirmed by a local bank.
- Bank Guarantee (BG), the most common; can also be entitled a Payment Guarantee or Performance Guarantee (PG) so long as it otherwise adheres to our standard SbLC verbiage.
- ISIN-registered and A-rated Corporate Bond or MTNs (types of securities, not insurance products). These are much less common.
- Alternative if BG/SbLC is problematic from your bank: a private company-issued commercial Promissory Note endorsed with a bank’s “Aval” (AvPN).
- Minimum 20%+ cash deposit instead of any of the above is also acceptable.
- An RWA letter and/or signed Authorization to Verify (ATV) letter sent to In3 via Email. An RWA letter would be from the involved banker(s) stating their intention to issue or endorse the proposed guarantee – any of 3 types. RWA stands for Ready, Willing and Able. An ATV letter is from the account holder known to the banker that enables the SbLC or other instrument, which we use only to make sure the involved banker is on board and RWA to issue the instrument when the time comes.
- Based on this, we verify, using the ATV letter, that the selected banking institution will provide the guarantee and the form, size, and strength of it. We provide free guidance on what’s preferable, but you get to explore possible arrangements for delivering the guarantee from the bank of your choice. The actual guarantee is not sent until the project’s funding is under contract, with commercial terms discoverable by the involved bank (they issue a tracking code), as the last step before financial closing. Closing is what unlocks your funding per the established draw schedule.
The monthly funding draw schedule, based on consistent (or increasing) cash requirements to reach “Commercial Operation Date” (COD) — is at least 10 of 12 months in a given year, and with enough guarantee coverage or cash deposit can be entirely drawn down in the first year. Remember that this is equity funding, not interest-bearing debt, as a JV/equity partnership, and mainly for building something — either a new “greenfield” project, retrofit, refurbishment, or expansion. The guarantee or cash sits as security until construction has been completed and project(s) commissioned to begin commercial operation. See example of how to structure a Monthly Draw Schedule on page 3 of this PDF.
In practice, any bank will do (low rated, unrated but authorized commercial banks, even smaller credit unions in the US would work), but we recommend starting with any bank that has already done its KYC on the party requesting the guarantee — where there is an established account or other relationship with the bank. A customer of the bank will usually get a faster and more measured response, saving time.
To request a guarantee, the account holder contacts the bank and fills out their application that identifies the amount of and reasons for the guarantee. Typical applications stipulate a specific period of time for which the guarantee should be valid, any special conditions for payment (explain that the guarantee would be governed by a Loan Agreement that will later become available, once it is entered) and that In3’s capital partner, a US-based Family Office, is the Beneficiary. Use the bank’s application or see page 2 of the sample BG/SbLC verbiage and fill in as many facts as possible.
This is not a requirement, however, as any experienced commercial banker will understand these instruments (if not, read Communicating with Bankers so you are prepared the next time). It is important to not accept the first “no”. They often throw obstacles in the path to see if you are committed.
Note that larger banks typically have multiple divisions, so make sure you are talking to the right one — NOT the “trade” division, but instead bankers that work with the division that handles private commercial banking, or wealth management. You will be better understood within private wealth management divisions, and otherwise cause considerable head-scratching and confusion, due to inherent silos most larger banks have, and confused banker rarely do what you ask.
In other words, within bigger banks (so-called “Tier 1”), you have to find the right bankers … then the above checkpoints get satisfied more quickly and our partners will usually complete due diligence within just a few weeks. If all goes well, you will negotiate and sign the funding contracts within 30 days.
Be sure to request the sponsor presentation materials or see below for a preview of what assets can be used to secure this guarantee.
Not sure if In3 CAP funding is right for you? Consider these conditions when In3 CAP is your best or only option.
Financial Guarantee Options
To assist with Doing It Yourself (DIY), outlined above, here is advanced “how to” information to succeed with guarantees using your knowledge, network, and drive. This is the only option presently available without additional costs.
Second, there is a quick service that would enable owners/developers and their agents/sponsors/promoters to pinpoint the best option(s) for securing a guarantee, largely based on the bespoke merits of the project or portfolio of projects seeking funding. More
Finally, be sure to review our Guarantee Sourcing Tips.