Step-by-Step Recommendations for Developers who wish to secure a CAG Sponsor
These materials and tips assist project owners/developers to facilitate their own “completion assurance” guarantee (CAG), whether from involving a wealthy colleague, well-established contractor or vendor (such as a sponsoring OEM, EPC or construction firm), or inviting outside stakeholders such as an equity partner, bridge lender, or asset owners seeking to leverage their holdings without tying up cash.
CAP funding downloads and tools you can use to introduce this program to prospective sponsors:
- Tear Sheet for In3CAP funding
- For potential guarantee sponsors: 1-page Overview for Guarantors.
- Share a landing page/introduction for candidate guarantors in3capital.net/sponsors
This opportunity to sponsor is most compelling to those who are asset-rich but “illiquid” with limited cash.
For mid-market CAP funding, developers without adequate cash, or much operating history (substantive bank account deposits typically determine bankability) or sufficient asset depth (net worth or liquid assets other than cash), the best strategy is to put your project in front of a party with this asset depth that stands to benefit from backing it.
First, consider what party or parties have an interest in the project such that they could be willing, if properly approached and incentivized, to issue an enabling guarantee, such as governments (Ministry of Finance only) for SGs, or to post a Standby Letter of Credit (SbLC) on behalf of the project using a message called MT-760, which can be sent directly from one bank to another via the SWIFT system*, or a Sovereign Guarantee (SG) from the sponsoring country’s Ministry of Finance (know more), or a simple Promissory Note with a top bank’s endorsement called an “aval” (summary of AvPN advantages).
Instead of a commercial bank’s SWIFT financial guarantee, sponsors can also provide direct transfer of a registered/rated bond, MTN (medium-term note) or gold with SKR (more).
Be careful with how you describe this to potential sponsors. The aforementioned assets are not used a collateral such as with a loan in the event of default. This is a method known in the finance industry as “hypothecation,” where the owner of the asset does not give up title, possession, or ownership rights, such as income generated by the asset. Complete list of asset types that can be used.
The newest option is a cash deposit, 25% or more, though some parties are uncomfortable moving cash. Compare Financial Guarantees to Cash
Which type of guarantee makes the most sense for your situation (and what are the basic steps)?
For a complete list of potential sponsors by type, visit Success Tip #1, here.
The rest of this article details Best Practices for involving third party guarantors, include a well-established EPC firm, General Contractor (GC) or vendor OEM supplying capital equipment.
Other practices, including very careful listening and expert communication can help guarantors gain comfort with your project and the CAP funding structure. Download our 3-page (PDF) problem-solving guide to this all-important communication.
If you want In3 to arrange a CAP funding guarantee for you, please read about our premium Management Services Agreement (MSA) options or In3’s Done For You (DFY) guarantee here.
Step-by-step procedure:
- Identify qualified candidates — develop a short list of both passive sponsors (those who would benefit financially from bringing an enabling guarantee) or candidate EPC/construction firms or OEMs that have a substantial portion of the project’s budget, are well-established (many years of operating history and reasonably large) and ideally that are motivated to take on additional contract work. An active sponsor that is already overrun and booked out for a year or two is not a good candidate, contrasted with those that have untapped capacity, staff that is fulltime employed but “between clients” or otherwise hungry enough to listen. When you find a vendor that would have a big chunk of the project’s budget, and is large enough, or at least well enough established (yet still somewhat “hungry” for new business) to align well with your project, first determine if they are qualified technically, and that they know your industry/plan well enough to add value. No point pursuing sponsorship if there isn’t a natural fit. Then you can explore if they would be a reliable and trustworthy contractor across the scope of work being contemplated — technically, from an engineering/design perspective, and/or for vendor relations/procurement, and certainly for project construction if /that is why you are talking with them. These services often involve a performance/completion bond from their side, which is normal practice for larger firms (they regularly provide them), and a good sign. See Tip #1, below, for why we cannot use any insurance (bonding) products instead of a financial guarantee. Be sure to inform them that this program is different, and to everyone’s advantage, so test their receptivity to learning about something new and unique. Not everyone wants to learn about such marketplace innovations.
- TIP 1: Why don’t we accept insurance in lieu of a completion assurance (financial) guarantee? Short version is that this topic is a source of confusion for many EPC and construction firms, mostly because the required Completion Assurance Guarantee seems quite similar, but in reality, good for the developer to mitigate the risks in their contract with the vendor, just not usable because it is backed by an insurance company, not by a financial institute such as a bank; more
- TIP 2: Ask for a referral. Check with trusted advisors in your network, starting with your local In3 Affiliate office, to help identify well-established EPCs, OEMs, General Contractors or other firms known to sponsor projects that we have financed. This depends on your unique combination of industry sector, project size, and geographic location, but more vendors are being added all the time.
- TIP 3: For passive sponsors, do not waste time with “leased” instrument providers. So far as we can tell, especially under $50m, they do not use banks with enough depth, or charge fees inappropriately, but do not deliver what they promise. A better option is to approach asset owners that are cash strapped but asset rich that wish to leverage their assets in a highly secure and efficacious program.
- Present your project and In3’s offer of “next gen” funding to prospective sponsors to get their candid reactions.
- TIP 1: Use In3’s PowerPoint slides that are designed to present the program to potential sponsors — ask us for these via Email, once your project has been registered in our tracking database and confirmed by us.
- TIP 2: Let prospective sponsors voice their concerns without arguing or giving up too easily. Just listen and verify so they know they have been understood before shifting into problem-solving. If they are open to the idea of a guarantee at all, conveying the facts can be extremely subtle. Prepare for this conversation with either this 3-page background paper, or by reviewing these FAQs
- Share your team credentials, experience and track records of success, to establish credibility in the eyes of selected prospective sponsor(s). You may also wish to share In3’s track record using our materials, or show them an available Letter of Intent or Expression of Interest in funding the project (available upon request to qualified project developers).
Why bother to present both the project and your team’s credentials before asking if they’re interested? Because they will just play along and placate (they’d be foolish not to) until you’ve put enough specifics in front of them that they can judge if the project is in their wheelhouse.- Recommendation: Build these important basics into a customized set of PowerPoint slide, per Tip 2.1, above. Have it ready, but do not automatically send it.
- Do enough research to identify that they are going to be inherently interested.
- Explain the process and propose basic terms & conditions to align incentives. An “enhanced” service fee can be paid (the long-term amortized cost is usually negligible in terms of overall project IRR and cashflows) as well as reimbursement of any bank margin (money paid to their bank to SWIFT a BG/SBLC guarantee) out of initial draws. Define how much they would be paid per milestones achieved (including any initial deposit) per a monthly draw schedule. Provide background materials as requested.
- TIP 1: Some firms are familiar with the idea of a partial financial guarantee used for payment security, but most are not. In3 and our Affiliates have a growing list of those who do understand and have previously agreed to bring a completion assurance guarantee, but whether this is going to be relevant to your need depends on industry, location, technical services required, timing, size, and who you talk to at the firm. This may be an area where In3 personnel can assist in 2022, but is tricky due to this diversity.
- TIP 2: Delve into their questions about In3’s funding program once you are satisfied with their depth of experience and other qualifications to perform the scope of work. Then and only then will a conversation about terms and conditions to bring a completion assurance guarantee of sufficient size would be worth having.
- TIP 3: Next Steps: Included in the initial conversation is the reality check – a request of them – to ask their bank to issue a draft of the proposed instrument based on our template and/or the bank’s established format. Let In3 know what bank and branch location is available for this, and ask them to obtain an unsigned draft of the proposed instrument. This will expedite the process.
- Offer our guarantee language template and then ask that their bank review/revise and send the draft guarantee verbiage (mainly a BG, SbLC or AvPN), and once approved by both parties, their bank will be asked for an RWA letter, described at Financial Guarantee Options & Facilitation Guide. Once the proposed instrument has been received and approved by In3’s partner, along with the draw schedule, this will launch our Due Diligence (Step 7 shown here) and leads to rapid closing (typically within 30 days) and first drawdown of funding soon thereafter.
- TIP 1: Do not offer an equity carried interest initially, as some vendors will not want it anyway (they prefer to build projects and walk away), while others would appreciate the opportunity to “partner” and further align incentive for a job well done. In those cases, a 2-10% equity interest (rights to cashflows for a limited period of time) may be appropriate. This is best reserved as a bargaining chip in case you request that a candidate sponsor bring a larger guarantee than is strictly required per the value of contracted services for the project.
- TIP 2: Draft the relevant legal language for how their contract could read — a sample paragraph is available showing how previous sponsors have agreed to bring the qualifying guarantee (request a redacted sample EPC agreement).
- TIP 3: Offer or provide any of our tools (including a recorded webinar on this topic) showing how sponsorship works to mutual benefit — and what the guarantor can expect as safety precautions, such as (a) the initial exploration is non-binding, just a pre-negotiation to test feasibility of the entire transaction before any binding commitments are made, and (b) the fact that such instruments cannot be called or drawn arbitrarily. You are using the guarantee to help align and incentivize the parties (keeping everyone’s “eyes on the prize”), where our partner’s bank provides the necessary funding, uses such guarantees to filter out fraud. More at the FAQ.
- Verify their interest — sometimes a fast “yes” can be a problem, so ask that they be candid and admit if they’re not yet sure what they’re being asked to do, or perhaps just not yet comfortable in doing so. Seek solutions.
This helps narrow down your options, assuming one or more concur the offered terms and conditions are reasonably attractive. Move forward with making contractual arrangements in the services agreement between your company and theirs to surface any sticking point. Of course, there’s no point discussing terms if you are uncertain about their fitness for the work, but having a short list of EPC/GC/OEM vendor options – the interviews that lead to their being contenders in the RFQ process – is certainly the best practice.
Ask about their payment schedule expectations. They may expect a substantial deposit which can make it difficult to gain approval of the overall monthly draw schedule. Ideally, the monthly draws of funding will increase or remain consistent each month, making large deposits problematic. If they require a large initial deposit, that can knock some vendors out of the bidding process. For more on constructing a draw schedule see page 3 of How to create a Monthly Draw and Capital Sources-Uses Statement (PDF) - Ask for any concerns or questions; if none, check to make sure they understand what they are committing to do, then ask for their commitment or (if questions remain) thank them for being open to playing it out.
We prefer that developers and sponsors work with major banks, with reasonably strong credit ratings, such as (ideally) a top 25 international bank. Such banks will have already registered via SWIFT RMA or RMA Plus. Central banks or national banks (some with US or European affiliates) may or may not have the asset depth needed for major infrastructure projects. The selected bank does not need to be local to the project.
How to select an appropriate bank to issue the guarantee instrument
Our partners rely on a network of relationships with hundreds of banks. Smaller banks can be acceptable for larger projects ($75 million and above), and can justify establishing a new relationship, and also enable us to overlook a bank’s less-than-perfect credit rating. Smaller projects are more difficult to justify. We use Moody’s for bank credit ratings. In some cases, an additional bank can serve to “confirm” (backstop) a smaller or low-rated issuing bank’s BG/SBLC. Confirming banks are usually among the Top 25, such as Citi, Chase, Deutsche Bank, etc.
Ask the banks to agree on the acceptability of the guarantee verbiage
Finally, a copy of the BG/SBLC, SG or Avalized Promissory Note (APN) language to be used in the SWIFT notice should be sent to us for pre-approval. This is recommended because the wording does matter (ask us for a template of sample verbiage), then the actual BG/SBLC will always be sent via SWIFT MT-760 to our underwriters to complete the transaction.
RWA letter and SBLC/BG verbiage templates, as all others, are available in the CAP Funding Profile Builder.
* SWIFT provides a secure network of ~10,000 financial institutions in 212 different countries. These SWIFT-registered institutions reliably send and receive information about their financial transactions. More at swift.com
See the protocol steps for Bank Guarantees or for Sovereign Guarantees or consider an Avalized Promissory Note instead.