What is a “Completion Assurance” guarantee?
Completion Assurance Guarantees (CAGs) are a type of bank-involved financial instrument that rely on well-established rules (mainly Uniform Rules for Demand Guarantees, URDG ICC 758 or “Standby” rules ISP98 ICC 590) and customary delivery procedures (usually via SWIFT), serving developers and their stakeholders as an excellent mechanism to obtain advantageous project capital.
In some cases, using CAP’s innovative structure, such guarantees enable access to funding that might otherwise be out of reach to project developers and their sponsors, such as 100% financing from a single source, which can be particularly challenging if the project is at a relatively early stage of development, not yet entirely ready to proceed with construction.
There are seven known situations when CAP is likely to be the best or potentially only option for up to 100% mid-market project funding, but still offered at attractive terms and with more forgiving Due Diligence than the traditional route.
This article explains
- Definition of this type of guarantee (a CAG), starting with defining what it is not?
- CAG’s purpose: this guarantee is not a traditional “loan guarantee” so why is it necessary at all?
- What types of CAP security can be acceptable? (Use decision-making guide to pick the best option(s) for your situation.)
- Quick guides to getting it done
What it is not: a CAG is not a traditional loan guarantee. Why? Loan guarantees stay in place for the life of the loan, mitigating the risk of default on the loan, and are often used by institutional lenders because the structure of such loans (using a Special Purpose Vehicle or SPV) provide limited or no recourse for the lender in case things go wrong.
Completion Assurance Guarantees end once the project is delivered — a milestone called Commercial Operation Date or COD. CAGs are also not insurance or bonds (insurance products cannot serve as a financial instrument; more), nor do they obligate the issuer to pay for cost overruns, a contractor that does not perform, nor a host of other issues that can crop up during new project construction.
The issued CAG would sit as a form of accountability for the parties to work together to finish the project. A cash deposit of 25% or more can also be used (compare), but CAGs or cash enable the family office funder access to their own capital for covering up to 100% of the project’s costs in exchange for equity.
Nor is it necessary to obtain the type of instrument widely used for commodity Trade Finance, a “documentary” Letter of Credit. Documentary LCs or DLCs are “cashed” (they can only use cash as their basis) upon completion of the trade transaction to pay the seller. Here, a “Standby” or “Demand Guarantee” works the opposite way: upon completion of the project, the guarantee is allowed to expire and is released (with any underlying asset returned, not cashed).
What it is: Unlike loan guarantees, In3’s innovative project funding (Completion Assurance Program™ or CAP) uses a financial guarantee that acts as a source of assurance, transactional security, or “surety” that the project will be successfully completed and commissioned to begin commercial operations. Simple, really. Most of what we add is background context for people who are already familiar with such instruments, as they’re thrown off by the fact that once the project reaches this milestone (Commercial Operation Date, or COD) the completion instrument is allowed to expire and is released.
If this elaboration does not seem important to you, stop here, and jump to our Quick Guide synopsis to facilitate your project’s CAG.
How this guaranteed capital is different (and better for developers): Traditional lenders also often require a senior lien (pledge of collateral) against the project’s operating assets as “first” line protection, with a traditional loan guarantee as a secondary source for added security, widely requested by traditional and institutional project funders as a type of “credit enhancement” to offset their perception of risk that such loans are non-recourse.
Our funding is still “non-recourse,” but we are also non-traditional, offering non-bank “alternative” financing through an in-house private Family Office, up to 100% of the project budget (something banks would never do). Even better, we do not ask for collateral (a senior debt lien), but instead use mezzanine debt, requiring no pledge of collateral as operating security.
Why is this guarantee even necessary? CAP funding’s non-recourse debt combined with a (typically) minority equity carried interest (exact split to be negotiated after completion of our due diligence), uses this innovative structure to fund up to 100% of project budgets above $25 million, without upfront fees. This capital is a hybrid of debt and equity from one source — a “one stop shop” approach — with numerous advantages, including that we take out much of the guesswork, making project funding more of a science than an “artful adventure into the unknown”. more
Project finance usually involves a Special Purpose Vehicle (HoldCo, often an LLC) that owns the project assets, enabling project developers/owners to build out qualifying pipelines more rapidly, using the assets of a built project as the basis (whether for a Bank’s Guarantee, Standby Letter of Credit, or bank-endorsement or confirmation) for subsequent guarantees, if desired.
Facilitating such a guarantee for a nonrecourse loan can be relatively straight-forward or quite a challenge, depending on (a) whether or not your own company has assets (balance sheet depth), or a strong enough credit rating, to involve a rated commercial bank or credit union, or (b) how you go about inviting a sponsor with deeper pockets to bring forward a guarantee on your behalf.
There’s another simple reason this guarantee is necessary: our funding partner requires it, as they draw on existing lines of commercial credit alongside their own cash holdings to fund new construction of infrastructure projects. This also explains why the funding is drawn down in monthly installments or tranches — to satisfy banker expectations for such new construction, further filtering out fraud, money laundering, etc. More on this at CAP Frequently Asked Questions.
Does it seem, at first glance, like this guarantee is too much work for not enough payoff? Keep reading, such as an introduction to the “art and science” of using financial guarantee to secure advantageous project funding at “Obstacle or Creative Opening” (article).
What is the payoff?
The trouble with Project Finance in the current marketplace is getting it secured, contractually arranged, and delivered. You have to choose wisely who to work with, and who to leave alone. By now, our track record gives us an upper hand in pre-negotiating fair terms and conditions with capital partners so you benefit from knowing this in advance. Nobody (including us) likes the “blind alley” that is so typical when dealing with mid-market project financiers that you don’t already know.
In addition, we usually offer better terms, making up to 100% funding accessible, and reach closings more quickly, compared to the traditional route. Certainly CAP funding has an important role to play for developers that are out of cash (and do not want to pay any sort of security deposit or other up-front fees), which is where a guarantee sponsor can come in handy, but along with our unique structure comes the advantage of knowing whether or not funding can be secured, with no commitments required to get a reasonably well-informed yes/no answer.
Short version: obtain the benefits and advantages of In3’s “next gen” capital, including that we radically improve funding certainty, without the false hope of bank or “at large” due diligence. For exactly how we will achieve that with CAP funding for your particular project(s), read on.
This is all about risk. Financial guarantees streamline investor/lender due diligence, ensure continuity and certainty of reaching closing(s), thereby greatly expedite funding, deliver better and more generous terms. Further, we can accommodate projects that are not yet shovel-ready (paying for the costs of remaining development steps as part of the loan/investment package), and simultaneously overlook various most other risks or vulnerabilities that would likely delay or outright kill opportunities for securing a project’s funding through more traditional sources (banks, private project financiers, dedicated funds, multilateral finance institutions, etc.).
CAP Funding is highly entrepreneurial and flexible (a true partnership) about risk/reward. Our funder fills the gap between the guarantee face value and the total required capital, usually as an equity “kicker” (exact amount to be negotiated upon completion of our due diligence). Note that once pre-qualified, we also do not charge for due diligence, written expression of interest, letters of intent, binding term sheets, funding contracts, site visits, or let anything else stand in the way of securing funding at these advantageous terms.
Quick Guide (2-pg PDF) to Securing your project’s Completion Assurance Guarantee (PDF)
Complete Step-by-Step Guide to Securing Completion Assurance Guarantees
Step-by-Step Detailed Instructions
In3 Premium Services to arrange your project’s guarantee
Stepwise Implementation Guide: Complete Steps to Project Fundraising Success using CAP.