In3CAP Guide to Bank-issued Financial Guarantees
Your banker, or any banker familiar with your project’s proposal for funding, will want to see our standardized “verbiage” (technical wording) of the financial instrument that’s being requested.
It follows the basic terminology and conditions of well-established rules, using either Uniform Rules for Demand Guarantees (URDG International Chamber of Commerce pub. no, 758), or International Standby Practice (ISP98, which goes by ICC 590). UCP 600 may also be an option in certain markets. (Don’t worry … we won’t carry on about this. It is a bit of a hornet’s nest. Just note that there’s another layer, and keep reading. This article will introduce necessary terminology but define any “banker-speak” you’ll want to understand to succeed to facilitate arrangements for this advantageous money.)
As you may know, the most common name for this type of guarantee is a Standby Letter of Credit, Standby LC or SbLC. This is effectively the same as a Bank’s Guarantee or BG, but there are several other types that can be used; be sure not to miss this Quick Guide overview
Bottom line feasibility for a bank-involved SbLC: whether or not the applicant (you or a sponsor, requesting that the bank issue the instrument with our Family Office as the “beneficiary”) happens to be a) creditworthy and/or
b) has access to non-cash assets that can be used as collateral (a technique in finance known as “hypothecation” — the use of an asset without actually transferring ownership), OR
c) you happen to know someone that is quite creditworthy (with an audited balance sheet, ideally) or does have assets that could be pledged / hypothecated.
If not, ask In3 for help. If you cannot afford to pay In3 for premium service assistance, we’re sorry to say that we cannot help.
If an SbLC seems feasible, then what?
Upon approval by at least one of our partner’s funding banks, the issuing banker(s) that agree to issue the SbLC will be asked for their written letter of intent (called a Ready, Willing and Able or RWA letter) stating that, once the SbLC “undertaking” (banking term for the transaction) is deemed to their complete satisfaction, they will indeed follow through and issue the “operative” (live) instrument via SWIFT and then hardcopy. The RWA letter may be optional in some cases, but an Authorization to Verify (ATV) letter is nonetheless going to be required.
The ATV letter will be the last milestone before launching our due diligence, and assuming all goes well with that, so the project’s funding can be contractually arranged with our Family Office partner, then (and only then, once that contract is duly negotiated, signed and notarized) will the SbLC get issued — sent via SWIFT as the last step before financial closing.
Download SbLC template | Verbiage essentials | Download RWA Letter template | Deciding which type to use
Who can bring the qualifying Completion Assurance Guarantee?
The project developer/owner facilitates the guarantee, but if there is insufficient base of assets to obtain an SbLC or other type of CAG, the other options are
- Arrange a Sponsor — proper presentation of this request for a guarantee helps start the conversation on the right footing, with the right expectations and underlying assumptions. All guarantors need to be incentivized or they will rightly ask (but maybe not out loud) “Why would we do that?” … or “What’s in it for me?”
- Work with an In3 Affiliate to secure a guarantor as part of a services package
- Hire In3 Capital to assist exceptional teams with qualifying projects with a Done For You (DFY) Guarantee.
See these Practical Tips for Sourcing a CAP Guarantee or an overview of successful strategies, below.
Here are the three main approaches In3 offer to arrange a guarantee via sponsorship:
- Clients often involve a stakeholder or hired contractor as the sponsoring guarantor (an EPC, EPCM, General Contractor or major equipment supplier), which is one way to build in a motivating incentive. Ask for our presentation materials if this is how you plan to approach your project’s completion assurance guarantee.
- Another way is to involve an “at large” asset owner that would have an interest in leveraging their non-cash assets for a cash return (paid out of proceeds) plus optional equity carried interest for a period of time. If In3 does this for a client we call that a “Done For You” (DFY) premium service. More
- Or instead of an asset owner/manager, a mix of senior debt and CAP’s equity preserves the owner’s equity and makes a strong incentive available to the lender. More about how this works.
- If you wish to pursue this “hybrid” of debt and equity, where an In3 lender (other than the CAP funding family office) or one you source provides a partial guarantee, we call that Program 3.
- If In3 facilitates this arrangement, obtaining a guarantor for your project (standards for that premium service, “done for you”, are much more strict), then ask for Program 4 with additional Senior Loan.
For more: Guarantee Quick Guide | Detailed Instructions (3-page PDF) | Success tips on obtaining a guarantee here
What’s in a name?
We much prefer Standby Letters of Credit (SbLCs) as bank-issued “demand” guarantee instruments, but we can also use the following less common names, but be careful … this is just the instrument’s title (headline of the document) … the require verbiage MUST largely conform with our template using the same rules no matter what it is named:
- Standby Letter of Credit (SbLC)
- Bank Guarantee (BG) or Bank’s Letter of Guarantee (not allowed in the US)
- Payment Guarantee (PG) but not an “Advance Payment Guarantee” (APG), as the latter implies payment before the project’s funding, which doesn’t work.
- Blocked Funds, though this usually offers less protection for the issuer, as it is more freely callable.
In the US, an SbLC is effectively the same as a BG, though in the UK and some other markets they refer to this type of instrument as a Bank Guarantee (BG). At present, our funding is from the US, so an SbLC is much preferred to any of these other forms so we do not have to involve any overseas subsidiaries or partners.
In addition to a Sovereign Guarantee (SG) with bank confirmation, we can also use a private, commercial Promissory Note, with a bank’s endorsement called an Aval. This is rarely used, but AvPNs can be obtained from a private party with sufficient financial depth per our templates.
We can accept Bonds (a type of debt or securities instrument) used during Construction in lieu of a bank-involved guarantee, including “green” or “blue” bonds, government bonds, private company bonds, or industrial revenue bonds. Must have an ISIN number assigned and credit rating.
When In3 CAP funding’s guarantee is your best or only option
Summary of options for securing CAP funding
In addition to the above SbLC option, which is the place to start (simply because it is the most widely used), three acceptable alternative types of financial instruments:
- ISIN-registered and rated bonds. The rating must be top notch — probably A- or higher.
- In countries where the Ministry of Finance can issue a Sovereign Guarantee (SG) when it can be confirmed by a local bank.
- An bank-endorsed Promissory Note per “Aval” (AvPN)