Financial Guarantee Essentials: What is an RWA Letter?
A “Ready, Willing & Able” (RWA) letter verifies that a bank or financial institution is prepared and will be able to proceed on behalf of a client for a specified financial transaction. For In3’s funding purposes, the transaction is usually a completion guarantee brought forward by the project developer or a sponsor from a bank for one or more identified projects to be financed through our partners.
An RWA letter will state (per our recommended templates — here is the template for a BG/SbLC) that the sending bank will follow through for their customer or the guarantee’s “sponsor” per establish banking rules and send the pre-approved guarantee instrument when the time comes. When is that time likely to be? Assuming all goes well (statements made to In3 are accurate, per due diligence), the RWA letter expresses the intention by the bank of sending the guarantee instrument bank-to-bank once all contracts have been negotiated, agreed, signed and notarized. The guarantee itself then moves via SWIFT MT799 and MT760 (hardcopy sent via courier) to become an “operative” instrument, the last step to reach financial closing.
This funding agreement is tracked by the issuing bank; in fact, a tracking code is assigned that is usually included in the “header” of the SWIFT notice, as the agreement to fund and guarantee are connected. The funding agreement is what determines how the guarantee is to be used.
It is important that bankers asked to issue the RWA letter appreciate that we are not asking for their commitment to do anything ahead of these future events. Because sending the finalized instrument is the last step to secure funding, we use an RWA letter earlier, well ahead of closing, to show the bank’s intent, ability and willingness (true readiness comes later) to proceed with the transaction once all qualifying terms & conditions for the funding are agreed.
The RWA letter does not provide any actual guarantee of anything, nor obligate the bank to deliver the instrument — it is truly an expression of intent to do so. It helps flush out concerns, objections, or misunderstandings to avoid wasting time. It is not an obligation or “irrevocable” by the bank — in fact, it is at most a contingent commitment that depends upon the parties and counterparties agreeing on the funding contract. If binding terms and committed funding does not materialize (and financial closing is not reached), the bank would not be asked to send the guarantee instrument at all; their letter would simply indicate that they were willing and able to do so. See Myth #4 at Communicating with Bankers.
Why the RWA letter can be important to securing CAP funding
Together, our program helps manage and set expectation for funding specific projects. Further, we typically do not charge up-front fees, but do invest substantial time and effort (and money, sometimes involving outside professional services to visit the proposed site, arrange contracts or conduct due diligence), so the RWA letter is necessary to make sure the guarantee will be forthcoming from the client’s side to reach financial closing.
The RWA letter is on behalf of the bank’s client (usually the project developer or sponsor). If the banker is still reluctant, once you’ve explained all this to the sending bank, ask what concerns them, and see if you and the banker can identify the root cause of their hesitation? What would help? Depending on their objection(s), there are often solutions available.
Question 1: RWA letter verbiage — can it be changed by the involved banker?
Yes. Be aware that the RWA wording is fairly flexible, and largely non-binding – really just stating the intent. Technically it is optional with some exceptions (such as if making a change in the actual Standby Letter of Credit / Bank Guarantee verbiage, then we need the RWA letter to formally request and justify the need for variance.
The next step with securing a CAP guarantee involves a letter from the project developer or sponsor that gives consent to our funding partner to verify the validity of the issuing bank account. The involved banker will receive an email once there is an Authorization To Verify (ATV) letter notifying the banker of this intent, also stating that the bank is “RWA to deliver the instrument”; together or separately, these letters help flush out whether or not the bank is on board.
There are two broad styles of RWA letters and either of them can be acceptable:
- Reference to the governing ICC rules (such as ISP98 or URDG) to mirror the instrument verbiage.
- Without such reference, alternative text can be broad-based and more streamlined.
Either approach works. Even an entirely different expression of intent from the involved bank(ers) could be acceptable. What does NOT work is when the bankers try to cover all the perceived risk exposure in the RWA – often born of the misguided belief that the RWA letter itself is an irrevocable commitment – by adding all kinds of disclaimers and attempts at CYA.
Such restrictions are where an RWA letter can get bogged down, although the review and comment process can be a useful albeit labor-intensive way to build consensus. Some bankers feel needlessly exposed, because they have not seen the funding contract yet, and thus will try to put restrictions in the RWA letter to cover their mitigate this sense of risk, or change the verbiage of the SBLC/BG that they’re agreeing to send, etc. That’s where, best case, an RWA letter draft-and-review conversation does facilitate getting clear about the bigger picture for delivering a usable instrument (such as the fact that an investment agreement does most of the risk mitigation work for the client and their sponsor/bank, tied to the BG/SBLC), but worst case can cause lots of wheel-spinning and lead to the conclusion that the bankers simply aren’t going to deliver what the client or sponsor needs.
In this latter, worst case scenario, the client or sponsor might need to go over their heads (work with different representative(s) of the bank) or find another bank.
Question 2: What reassurance is there that the project will be funded once the developer is under contract and has reached closing?
There are several ways of satisfying this understandable need for mutual KYC (know your customer). Normally, just prior to sending the guarantee instrument, there is a mutual safety check via a SWIFT “advisory” (text only) message called MT799 or MT199 that the issuing bank provides, which signals that the instrument (via MT760) will follow. It also serves to ask the funding bank if they are on board to fund the project in full. Our partner’s funding bank responds to this MT799/199 SWIFT committing to having adequate “clear and clean” capital capacity to fully fund the project(s) per the commercial agreements. More on these mutual protections here.
Thus, an RWA letter is stating the bank’s intention and capability to do their part with providing the referenced guarantee instrument (issuing a Bank Guarantee / Standby Letter of Credit, endorsing via bank “Aval” a commercial Promissory Note, or confirming a Sovereign Guarantee) when asked to do so. But again, the bank’s part in the guarantee instrument is contingent upon the parties to first agree that the funding has been arranged per mutually-acceptable terms and conditions. There is nothing directly binding, irrevocable or “material” at the time of the RWA letter issuance. No money should change hands at that point.
Further, our RWA letter templates provide sample language, and modifications in the exact wording are allowed so long as it still upholds the overall intent to promise they will later do their part to assure delivery of the enabling financial guarantee. First there must be an agreement with the bank on what that means — the exact verbiage of the instrument gets approved first.
Question 3: What if the sending bank objects to the RWA letter?
If they are less comfortable with the RWA letter wording, suggest they modify it (with the above proviso about upholding the original intent) so that it would be acceptable to them, then share that revised draft with us to see if the alternative wording will work.
An acceptable alternative to the RWA letter would be direct Email and/or phone contact with the sending bank officer(s) involved. Start with an Email from or referencing the banker(s) that were asked to issue the instrument and RWA letter so we can confirm their participation that way.
Sometimes an RWA letter is sent together with a SWIFT MT-799 (considered “pre-advice,” meaning that it is a text message only — does not constitute a guarantee), though this is not required. Without optional MT-799, a signed RWA Letter can be sent via Email or as requested by the receiving bank. Email is preferable, until we’ve been able to authenticate the involved banker(s) and associated account.
To recap: the main purpose of the RWA Letter is for the project’s Developer or Sponsor to signal their intent to provide the required financial guarantee. SbLCs, BGs and SGs use SWIFT MT760, a widely-used message type for such instruments. The RWA letter and Authorization to Verify (ATV) letter enable us to proceed through the steps of pre-qualifying, due diligence and then (if all goes well), reach binding terms for funding, closing and drawdown of funding to complete and commission the funded project(s).
The alternative to these instruments is a cash deposit, typically 25% or more, held until the final draw of funding into the project owner’s SPV bank account, then released in lump sum, or in rare cases, a Commercial Promissory Note, where a bank adds an “aval” or stamp (widely used in Europe), which we call an Avalized Promissory Note (AvPN).
This use of an RWA Letter and/or ATV Letter launches due diligence and also forms an integral part of In3’s capital partner due diligence. Ask us or your In3 Affiliate for the appropriate RWA and ATV letter templates for your situation.