Using CAP Equity Investments for Senior Loans

CAP funding can be used to arrange 100%, full leverage, financing, with no additional “skin in the game” — just the Family Office funding in the capital stack — with sufficient completion assurance Security.

As a minority equity investor, we can help lower the hurdle of adequate Security for the target funding (see chart showing minimums here or below), once arranged, by then adding Senior Debt.

This does not decrease the amount of equity carried interest to be sold, but does enable full funding with smaller amounts of security, if the equity investment qualifies. Because Senior Loans must meet industry standards, if your project does not, and it cannot be further developed to meet such standards (eliminate or transfer remaining risk), you would be better off sticking with 100% CAP funding and the larger amount of Security required for that.

But for some clients, arranging one or more senior loans as part of the total funding package will prove to be the more direct route. The sequence of steps for this option boil down to

1) Evidence of Security for CAP equity (smaller cash deposit or SbLC for just part of the total funding)

2) Contract for and Close on Equity Investment of ~10% up to 90% depending on total deal size

3) Then we help arrange a Senior Loan for the rest.

For example, if you seek $100 million in total funding, but have only $10m cash deposit, the optimal cash deposit for the full funding would be 33-35%, or ~3x (for better terms), so to make that $10m work for you, consider $30m in CAP equity funding, then we can help you secure a Senior Loan for the remaining $70m for a total of $100m in funding.

How much Security? See comparison chart below. More than the strict minimum gets you better terms along with faster draws of the invested funds.

Although CAP funding’s equity does not follow the traditional standards of key ratios and acceptable risks to qualify for 100% funding, Senior Debt usually adheres to tighter industry standards that vary somewhat. For most projects, here is a short list of requirements, with more at Financeability Checklist

• Loans must amortize over the desired tenor (number of years) at the going rate of interest, with up to 24 or perhaps 36 months principal repayment deferred (interest only), typically.
• Developer track record — institutional lenders seek experienced teams working in familiar markets with proven technologies. If this isn’t you, either expand your team or stick with 100% CAP funding.
• The borrower must be reasonably creditworthy, pledging the assets of the built project as collateral; some institutional lenders will also ask for a loan guarantee as further credit enhancement.
• Debt Service Coverage Ratio (DSCR) above 1 (1.2-1.5 minimum) per a US GAAP or IFRS financial model. Ask us what that should look like if you are unclear or visit our Glossary for a definition.
• Internal Rate of Return (IRR) unlevered above 12% or so, depending on the going rate of interest
• Sales projections guaranteed via a strong offtake agreement or purchase agreement from creditworthy buyer(s). Market analysis helps make this case.
• Careful selection of vendors — Engineering, Procurement & Construction (EPC) or General Contractor … they typically bring insurance bonds or similar coverage for their part.
• Reasonably low risk profile in the critical areas of technology performance, both volumes and quantity of output, financial modeling that reflects annual increases based on Consumer Price Index (generally 3% except during inflationary times), and hazard insurance. Recommend comprehensive “all risk” insurance wraps or at least a rate quote for same, subject to formal review by insurance provider. In3 can provide a referral to a qualified insurance provider.

Please contact In3 or your Registered Affiliate any questions.