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Sovereign Guarantees & Verification

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Sovereign Guarantees & Verification

Definition:  Broadly, Sovereign Guarantees (SGs) are given by host governments to assure project investors that the government will take certain actions (or refrain from taking certain actions) affecting the project. For project finance purposes, an SG serves as a financial guarantee, transferring risk to the government in the event of default, usually as part of public-private cooperation (such as a public-private partnership) in line with policies, initiatives, mandates or particular goals of that country.

Governments will want to issue an SG for the full project’s budget (total costs) when they have confidence in the private-sector developers and when that SG will stimulate and accelerate investments in their country. Often government agencies will also want to obtain the benefits of the project(s), once operational, such as electric grid stability, energy, food and water security, affordable “social” housing, or other infrastructure.

By contrast, developed countries almost never issue SGs for projects in their own country because they do not need to. In more affluent countries, private-sector infrastructure projects are already obtaining financing at reasonable rates (even if the private parties move slowly or change terms unexpectedly), so the government need not partner to make that happen.

But many developing countries and emerging/frontier market host governments will partner or cooperate with private developers to streamline the process. An SG can greatly accelerate fundraising, and is particularly useful no matter what the country’s economic status for establishing new industries, creating jobs, and or stimulating growth.

How to obtain and use a Sovereign Guarantee

First, check that In3 can fund the project(s), then use our 3-step process to arrange funding with a Sovereign Guarantee (SG):

  1. Request the proposed SG: Download the template to ask the government official (normally the Minister of Finance) for their own version of the SG wording, including the name of the issuing authority, and send that (MS Word of PDF) to In3 for review and approval.  The proposed SG doesn’t need to be signed for now.
  2. Confirmation Letter:  Once approved by In3, then request that a commercial bank verify/authenticate the SG via filling out this SG bank confirmation letter template.  The involved bank does not need to be located in the host country.  Send the bank’s signed commitment letter to In3.
  3. Funding contract:  Upon receipt, we launch due diligence, and if all goes well, the developer or government would enter a contract for the funding, sign/notarize the agreement, then send the signed SG approved in Step 1 through the bank from Step 2 using MT-760 SWIFT.  Hardcopy follows via courier.  This marks financial closing.  Funding flows per established draw schedule then the project reaches Commercial Operation Date (COD) to begin operations.  That’s it!

Gaining government participation

In smaller nations, you may need to use diplomatic ties for a proper introduction, or if you or someone you know has existing connections to high-level government officials (e.g., President or Vice President), that will help you gain proper attention by the Minister of Finance (MoF).

Note that we ordinarily accept SGs issued only by the MoF, or when issuing authority has been given to another agency by law — in which case we would need to show the actual legislation or executive order authorization to our underwriters.

Either way, you will want to first make sure the project(s) are sufficiently beneficial to the country to justify their participation.  Once that’s established, you would start with requesting a “specimen” or unsigned draft of the proposed SG, showing In3 Capital Partners as the Beneficiary, then once approved by In3, you would ask a commercial bank to confirm as described above.

What if the country cannot issue a usable Sovereign Guarantee? What are the post-COVID-era Best Practices?

If an SG is simply not available from a qualified authority within the government, but that agency is on board and supportive of a project or portfolio, the government can often compel a bank to issue and send the bank’s Standby Letter of Credit (SbLC) instead of issuing an SG. The IMF provides loans to many developing countries, and blocks SGs, while an SbLC enables the country to receive the same benefits provided by In3 Completion Assurance Program™ funding.

SGs are usually free to the developer, but also increasingly uncommon due to COVID-era debts and development pressures.  Government leaders that support the project(s) may not want to push the IMF to realize that an SG is not debt (it is a contingent obligation, not a direct loan), but they can still ask a bank to directly issue an SbLC or Bank Guarantee (BG) instead, with the government as the sponsor.

Because of In3’s innovative model, the SG’s Confirmation Letter involves a bank in any case, thus government officials can instead simply request that a local bank use an SbLC/BG backed by the country’s treasury.  With an SG, the bank would SWIFT the instrument anyway, bank-to-bank, so this approach streamlines delivering the guarantee instrument while sidestepping any in-country politics or unworkable policies.

The nominated bank can be asked by the government for a draft of the SbLC or Bank Guarantee instrument they would issue (using their own format) if the SG is not feasible, but to save time it is much better to download and send them In3’s pre-approved verbiage template.

Is the Project Developer concerned about covering the initial cost of a guarantee?

Of the acceptable guarantee options (refer to the aforementioned facilitation guide), the SG and Avalized Promissory Note (AvPN) are the least costly — often free or close to free to developers. The AvPN does require a creditworthy party as the primary guarantor (the bank is secondary with an AvPN), so that is another option for government sponsors, where the bank providing the Aval is not exposed to undue risk.

Visit In3’s Proposal Builder for the proper MS Word templates to save time using pre-approved verbiage.

No guarantee?  To evaluate cost/benefit/advantages of CAP funding using a guarantee versus a cash deposit for CAP equity or available alternative funding see compare.

Tips to help arrange a Sovereign Guarantee

If your project qualifies in terms of our 4 S’s — Size ($25 million or more; $50m preferred), Sector (anything that, at least, does no social/environmental harm), Stage (any, in a country without sanctions and with properly disclosed uses of funds), then for Surety, the 4th “S,” we may be able to issue a signed Letter of Intent (LOI) or Expression of Interest (EOI) in support of obtaining government participation for one or more projects.

In3’s LOI showing our support can help developers clarify the following with government officials:

  • The public benefit of the project(s), enabled by the financing
  • Who will do what? Basics of a public-private partnership or at least the type of cooperation that will be required.
  • Who will own the project(s) and how will the various stakeholders benefit?
  • How long does it take to receive funding, once the SG is received?

Here are the complete steps and best practices for using an issued Sovereign Guarantee to expedite project finance via In3’s capital partners:

  1. Receive from the government official and review with In3 the verbiage used on a “soft” copy of the SG, usually in PDF or MS Word. This should include the Minister’s name and on ministry letterhead, or a stamp or seal. Download our recommended template in MS Word.
    • Check that the issuer is either the country’s Ministry of Finance (MoF) or equivalent, with direct ties to the national treasury, or with delegated, legal authority from the MoF.
    • The “beneficiary” (investor or lender) should be specified by name, for now “In3 Capital”. Ask for our template of recommended verbiage and use that as a guide. Otherwise, language in the SG may need to be adjusted prior to issuance, or reissued entirely.
    • If an SG was not sent to you via the government directly, are you sure it is from a reputable source, agent, or third party? There are many fraudulent SGs that travel around looking for victims.
  2. Request that the issued SG be verified and authenticated by a rated bank using our letter. Download template. This is a requirement.

    The bank selection does matter; the larger the better, but should be a rated bank (credit ratings such as Moody’s), ideally one that has an established RMA or RMA Plus (SWIFT) relationship.
  3. Ask that the signed bank letter be sent via SWIFT using MT-760. Some banks will push back at first and decline to verify the SG, which is the point of this step — to make sure the SG itself is valid and issued with the proper authority. Some banks will ask that it go through a governmental approval step first, such as formal approval through the nation’s Parliament or whatever system applies.

    Note on SWIFT fees: Issuer (developer’s bank) and Recipient (underwriter’s bank) are each responsible for their own fees charged by their respective banks.
  4. Establish or disclose the domicile (country/location) of the Special Purpose Vehicle (SPV) that will own the project’s assets. Typically this is in the United Kingdom, but there are other options. Set up an escrow account with the local bank to be used for transferring funds.
  5. Developer enters contracts for the funding — typically a Loan Agreement and Share Purchase Agreement. Contracts are signed, notarized and delivered.
  6. Have the original (signed hard copy) of the SG sent to the vault of the SPV’s bank. NOTE: Upon receipt of the SG hardcopy after the MT-799/760 SWIFT, initial funding flows within 30-45 days after closing, per the established draw schedule.
  7. Send us a letter acknowledging the above steps and the existence of the underlying public-private cooperation being employed. We will confirm receipt and offer approvals at each step.

Wrap-up / Recap

These are the main steps and tips for obtaining and using a Sovereign Guarantee for financing projects through us. This can actually happen quite quickly, once the various parties agree to proceed.

See our investment terms & conditions for the quantitative aspects of an acceptable project or portfolio to be financed — minimums do apply. This is part of our briefing materials, available to qualified project developers and their authorized agents for review.

Finally, note:

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