Practitioner Series: Financial Guarantees 101

Definitions, Motivation and Decision-making support

We organized the Completion Assurance Program™ (CAP) specifically for mid-market project developers who want either 100% financing (combining mezzanine debt and equity from one source), or for projects that are not quite ready to begin construction, or for projects that are hard to fund for other reasons.  If banks turned you down for funding, that’s not a problem for us!

The rest of this article explores what we mean by a “Completion Assurance” guarantee (definition), why such guarantees are useful, how to arrange one, and the set of clear advantages they offer for project developers seeking mid-market funding (above US$25 million, $35M+ preferred).

CAP funding is available via an in-house, US-based Family Office (FO) that accepts these “completion assurance” guarantees, one of several different qualifying types, In3’s advisory network, experience and proven innovations now give clients the opportunity to arrange a third-party guarantor for their impact projects as a Premium Service.  more

How to arrange a guarantee for In3’s CAP funding — “faster, easier, better”

Most In3 clients facilitate their own bank-related guarantee(s) to save money.  If that is your plan, download INSTRUCTIONS (3-pg PDF).

Click for more about the alternative instrument:Bank-endorsed (avalized) Promissory Note

With CAP funding, although shovel-ready status isn’t necessary, projects must be in one of the sectors we support, with a well-organized project package and minimal (close to zero) commercial risk.  Without quite low business risk, usually in evidence through supply-side and customer/offtaker agreements, how do you know the project is financially feasible?

Still, using available assets (any of the type shown at the right) temporarily as a pledge of collateral to a bank for their Standby Letter of Credit or Bank Guarantee (or other instrument type described below) opens the door to this advantageous capital.  What assets will we accept?  Ask your banker (or your sponsor’s banker) — whatever they’re willing to accept.

If your project still has above-average commercial risk, either hire us to help advise on how to strengthen your proposal and/or build a more investible package (to help you arrange your own qualifying guarantee via a sponsor), or come back to us later, once your project uphold these standards.

1. DEFINITION:  What is a CAP Guarantee?

   Question 1: How is this type of guarantee different from “loan guarantees” used to mitigate credit risk? 
   Short answer:  A traditional loan guarantee is a promise to repay a loan via a collateral asset used for loan security during the life of the loan. Here, instead, a rated commercial bank-involved financial guarantee differs from a loan guarantee because we only require that the instrument stay in place until project completion and commissioning; that is, only until the project’s assets are ready to begin operations.
   Known as “Commercial Operation Date” or COD, the issued CAP guarantee is then allowed to expire, and is removed. It will not be called, cashed or drawn if the parties involved are non-fraudulent. There is no subsequent credit risk mitigation or “credit enhancement” from that point forward.  This practice of using a so-called “Demand Guarantee” effectively filters out fraud, and aligns the involved parties by ensuring that funding is used for building and commissioning the project, and that the parties work together to resolve any issues to reach COD without fail.  As equity partners, the FO then relies on their joint ownership of the project’s operating assets to secure the loan, and does not rely on guarantees from COD onward (more).

   Three main types of usable guarantees:  Bank Guarantee/Standby Letter of Credit (BG/SbLC), or a bank-endorsed Promissory Note (AvPN), using the same rules as a BG/SbLC (we prefer URDG ICC 758), or in some countries, a Sovereign Guarantee (SG) that attaches to the national Treasury, as part of public/private cooperation.  For any of these types, a commercial bank must be involved for our funding bank to accept and use the DG instrument to finance the project(s).  Prepare to convey this to your bankers.

   Question 2:  How is this type of guarantee different from a “documentary” Letter of Credit (LC) widely used for trade transactions by buyers and sellers of commodity goods?  Short answer:  Unlike a Documentary LC (DLC), our Completion Assurance “standby” LC, a type of “demand guarantee” is released and returned to the issuer upon maturity following project COD.  It is allowed to expire, leaving the underlying value (asset class can be anything tangible the bank is willing to accept, from public equities, appraised artwork, gold, a line of credit, or even cash) untouched.  Instead of “cashing” the LC, as DLCs typically do, to pay the seller, here there is no “seller” and so the DG’s blocked asset is unblocked after COD, with all access rights restored.  It can be reused for a subsequent project or for other purposes, or simply returned if the underlying asset was pledged as collateral.  By contrast, DLCs require cash, while DGs can use any “cash-backed” asset. The cash underlying a DLC is effectively “spent” (paid to the seller once the buyer’s conditions are satisfied) for the goods procured.  DGs are more flexible, with underlying assets released, not spent.  Big difference!  In fact, the respective mechanisms of cashing DLCs versus releasing DGs are opposites.

   Question 3:  What other options exist if a financial guarantee is out of reach?  Project developers can involve a cash “bridge” lender or tap other sources of cash as an alternative form of security, which can be leveraged more than an SbLC or similar bank-involved guarantees (gold with SKR, registered/rated bonds, MTNs, etc.).  More at Security or Compare these two options, cash vs. SbLC.

2. MOTIVATION: Why might you want to arrange a CAP Guarantee?

Short answer: Because of the benefits and advantages they bring, when you qualify for our Completion Assurance [Guarantee] Program™ (CAP), where one of the main requirements is at least a partial guarantee.

Project funding above $25 million becomes “faster, easier, better” (more predictable, but also more flexible, at better terms) than the conventional route.

Another good reason:  to avoid the traditional route to project finance, which is a slippery slope for even those who are well qualified.  As you may already know, conventional project financing tends to be slow-going, somewhere between tedious and an ordeal, or at least “trial by fire” for most everyone seeking outside capital. Why?  Most project financiers are remarkably conservative, and look at worst case scenarios for most everything, spotting perceived risks where most everyone else would see blue skies.

Fact is, bankers won’t get fired for passing on a deal; job #1 is too often to keep one’s job.  They only stand to lose if they accept a deal that falters.  Such close scrutiny, seeking to find ways to “kill” the opportunity, is just not efficient, wise, or (in our view) necessary.  It is a design problem.  Article on how In3 CAP “happily disrupts” this notorious (but rarely discussed) challenge with traditional project finance.

The above points are part of what makes us different, but note that CAP funding still offers advantages over traditional project finance pathways even when the above conditions do not apply to your situation. What advantages?  Usually better terms for up to 100% financing via a more efficient, relatively fast, reliable and predictable process.  Thus, we become a “one-stop-shop” for both equity and affordable debt, further saving time, streamlining closings, and significantly increasing the odds of your success.  This radically improves funding certainty!

3. DECISION: Now what?  Resources to help you decide if CAP funding is right for your situation:

1. “Roadmap to Success” article – start here if you are uncertain of whether a financial guarantee is right for you
2. Completion Assurance Guarantees: “Roadblock or Hyperdrive Speedway?” – read this brief article if you see the capital guarantee as an obstacle, or hinderance, not as the opposite, a fundraising “door-opener”.
3. Decide which type of guarantee is best for your project with stepwise guidance to make it happen
   1. Usually a Bank Guarantee / Standby Letter of Credit (BG/SbLC) is the right place to start.  Here are the BG-SBLC verbiage essentials.  NOTE:  Only if you are working in a country that can issue a Sovereign Guarantee (SG) from the Ministry of Finance is there a decision to be made.  The above article will help you clarify your best option(s).
   2. What is a “sponsor” and why might you need one?  Project developers that lack asset depth, and not working within a JV, consortium or public/private partnership will want to involve a so-called “sponsor” (a backer/underwriter that can be given an incentive) in order to access advantageous funding through CAP. This strategy is worth a try, if you can confidently and skillfully present the sponsorship opportunity to a short-list of potential EPCs, construction management, or general contractors, equipment suppliers or integrators.  Ask for our presentation materials, some of which can be added to your own pitch deck.  Some EPC[M],  OEMs and Construction firms have had to limit the size of such guarantees, which must be at least 30% of the total budget to deliver terms and time horizons the developer would likely accept.  Thus, another strategy that is growing in popularity is to approach mission-aligned asset owners or wealth managers that could become potential stakeholders. This innovative structure takes a bit more preparation, but the net time investment is far less, and outcome more certain, than going into a “due diligence black hole” that is so common with traditional project finance with few exceptions.  CAP radically improves funding certainty and delivers powerful advantages to those with the patience to familiarize themselves with how it works.
   3. How to obtain a sponsor’s guarantee (step-by-step guide)
   4. CAP Proposal Builder — dataroom of helpful tools and downloadable templates
   5. Nine Steps to Fundraising Success using CAP — secure advantageous capital for qualifying mid-market projects with this step-by-step guide

Further Tips and Technicalities

Still not sure this makes sense for your situation?  Continue with our Frequently Ask Questions, or if you now wish to obtain the advantages of CAP, namely that funding is “faster, easier and better” this way, then consider these resources to guide your next steps:

1. How does it work?  Our process in 3 steps, or download detailed technical outline as a 1 page PDF summary
2. We prefer international banking rules as defined by well-proven URDG 758
3. Whitepaper: 4-page introduction to Capital Guarantees for Project Funding through In3
4. Completion Assurance [Guarantee] Program FAQ about how the guarantee is used, under what conditions it could be called, etc.