What is a “Completion Assurance” guarantee?
“Completion Assurance” guarantees (CAGs) are a type of financial instrument that serve developers and their stakeholders as an alternative mechanism to obtain advantageous project capital. In some cases, such guarantees enable access to funding that might otherwise be out of reach to project developers and their sponsors, such as 100% financing at an early stage of readiness.
If you want perspective, here’s a third-party (Investopedia) definition of “financial guarantee,” which in this case boils down to an instrument (a contract in the form of a bank-involved letter) that acts like an insurance policy, guaranteeing that the parties will work together to complete the project. If something goes wrong, the CAG serves as a form of accountability to cure the underlying problem to get back on track and finish the project. There is a lengthy “cure period” to work out whatever gets off track.
If the underlying problem cannot be cured, somehow, then some other solution will be found; the instrument will not be called except in cases of extreme fraud, and even then, the guarantor can be given step-in rights instead, as we have never called an instrument and really must not.
Usually, the type of financial guarantee most similar to a CAG ensures that a debt will be paid if the borrower defaults. That’s also called a “loan guarantee,” but that is not the purpose of this CAG; it is allowed to expire once the project is built and ready to begin commercial operation, at the beginning of principal debt service. From that point forward, In3’s family office funder takes on their share of risk. We simply will not accept the majority of completion risk.
How to Obtain a Completion Assurance Guarantee: We offer a streamlined and direct process to get under contract for mid-market project funding, $25m or above. This saves everyone tremendous time and energy compared to the traditional route. There is no cost when you do it yourself (DIY), … Continue reading
Click for Project Financial Guarantee Quick Guide
The rest of this article explains …
- What is this type of guarantee, starting with a clear definition of what it is not?
- Because this guarantee is different from a standard “loan guarantee”, why is it necessary?
- What types are available? Use decision-making guide to pick the best option(s) for your situation.
What it is not: (a) Not a traditional loan guarantee. Why? Loan guarantees stay in place for the life of the loan, mitigating the risk of default on loan repayment, 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. Loan guarantees serve as a form of “credit enhancement” along with a lien or UCC-1 filing; neither of these apply to CAP funding.
(b) Completion Assurance Guarantees (CAG) are also not insurance or bonds, though they serve a similar function, at least in part, by providing a backstop that guarantees completion, whether from a private company or a bank. A bond is a different type of instrument altogether (more). Completion Bonds or Surety Bonds are posted to provide protection in case the developer runs out of money, in which case the bond is used to provide monetary compensation to reach completion.
By contrast, with a CAG in place until the project gets built and commissioned, all the funding to reach completion is already pre-approved, committed via commercial contracts, with monthly transfers locked down on a bank-to-bank basis — in effect, counter-guaranteed by our private Family Office investor. CAGs must not be called or drawn — that is not their purpose. They are used to effectively filter out fraud. Further, insurance products like completion bonds cannot serve as a financial instrument, although if the insurance or reinsurance company would be open to offering a piece of its balance sheet to enable this standard type of financial instrument (bankers know the difference in types), then that would work. More at Success Tip 5.2.
(c) A CAG is not the same type of instrument widely used for Trade Finance, a “documentary” Letter of Credit or DLC. Documentary LCs are “cashed” (they can only use cash as their basis) upon completion of the trade transaction to pay the seller. Here, a CAG is instead a “Standby” or “Demand Guarantee” that works in 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 commits the funding at advantageous terms because it acts as a source of assurance, transactional security, or “surety” that the project will be successfully completed and commissioned to begin commercial operations. Once the project reaches this milestone (Commercial Operation Date, or COD) the completion instrument is allowed to expire and is released.
For project fundraisers that have few or no tangible assets (no balance sheet depth, either directly or indirectly through another stakeholder), the CAG serves as a type of credit enhancement for the loan, alongside a balance of equity carried interest, for up to 100% financing with no payments whatsoever to In3 to pre-qualify and get under binding contract for the required funding. Each party covers their own expenses for due diligence and legal fees, if any, for making the contractual arrangements.
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, and with a traditional loan guarantee as a secondary source for added security for such non-recourse loans. CAP funding is still “non-recourse,” but 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 necessary? CAP funding’s mezzanine 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 predictable, replicable science than an “artful adventure into the unknown”. More on the structure (FAQ#9) | Notorious problems CAP funding solves.
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 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. It also matters how you go about inviting a sponsor with deeper pockets to bring forward a guarantee on your behalf. Sponsor landing page
Seem 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).
Why does this matter?
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 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 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.
Guide to Securing Completion Assurance Guarantees
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In3 Premium Services to arrange your project’s guarantee
Further Backstory and Definitions to help understand financial guarantees
Both types of financial guarantees — Financial “Completion Assurance” and traditional Loan Guarantees are legal instruments (an official letter) that assigns some or all of the responsibility for an investment or a loan. But in our case with In3 CAP funding, the instrument is used to access advantageous funding and remains “operative” (in place) until completion of project construction and commissioning (COD). It transfers some of the risk of non-completion to the guarantor as a way to align the parties on project completion. In practice, whatever happens to go wrong ahead of completion, the guarantee serves to remind the parties to work together to resolve the issue. It reminds as well as holds accountable these parties to see it through no matter what. If there are serious problems, such as a discovery about the site that makes it unusable, for example, then another site must be selected. More at FAQs
By contrast, a loan guarantee would consider non-payment of the loan itself a form of default, while a financial (completion) guarantee instead uses the borrower’s breach of contract (loan agreement), such as due to fraud, malfeasance or other failure to honor obligations prior to COD, following a cure period. Nobody wants to see the instrument get called. Such guarantees are a “last resort” promise or pledge — a type of credit enhancement (improvement of the borrower’s credit profile) — in the event of non-performance.
They also differ from Completion Bonds (insurance), although such insurance “Completion Guarantee” products are often used by developers or hired contractors in addition to our CAP financial instrument. The difference is subtle, but important: Completion Guarantees are issued and backed by insurance companies, while financial instruments used for project financing involve a bank so that closings and funding can move with greater security, loans can be at lower rates of interest, and equity partners can be gained that do not expect a controlling interest. Project funds move on an automated draw schedule with certain aspects similar to so-called “Smart Contracts”. These and other innovations offer great advantages to project developers and their hired vendors, sponsors, intermediaries and contractors.
In3 project finance uses primarily bank-related guarantees (traditional “standby” or “demand guarantee” as a Bank Guarantee / SbLC or non-traditional Avalized Promissory Note) until COD to ensure that the assets are completed and commissioned to begin commercial operation. We can also accept a Sovereign Guarantee (more) with public/private cooperation, once it is verified by a rated commercial bank.
Benefit: a financial (completion assurance) guarantee frees up the parties to do their respective jobs, with …
- Less risk aversion by In3 investors, more streamlined due diligence, greater flexibility in working with issues, including a willingness to pay for any remaining pre-construction steps
- Greater speed and certainty in reaching closing and first funding (once pre-qualified, mutually-acceptable terms will be available within 2-4 weeks), and then less scrutiny after reaching financial closing, during construction, along the way to Commercial Operation.
- Fewer constraints or restrictions placed on the operating company, such as longer loan tenors (allowing plenty of time to repay the loan, no penalty for early repayment), ability to invest in the local currency, and no lien against operating assets (see below).
Financial guarantees serve to both expedite and backstop the capital, providing mutual protection from bad behavior such as fraud, gross negligence, or other incurable breach of contract.
Originally, sovereign guarantees were instituted to make up for market failures*, but in modern times, financial guarantee instruments are now used in the commercial (private) sector to streamline project financing by simply holding developers and their counterparts to their promise to honor the terms of the financing. With In3’s Completion Assurance [Guarantee] Program™ (CAP), the guarantee is offered as a form of surety/security that the project’s assets will be completed and commissioned to reach COD.
NOTE: Until early 2022, this completion assurance was called “Capital Guarantee” but based on feedback, we changed the name (see 3/27/22 announcement).
Even if you are already familiar with loan / financial guarantees, or similar techniques for credit enhancement, please read our materials carefully, as there are many sharp differences between the conventional uses of guarantee instruments (namely trade finance, and so-called “documentary” letters of credit — see below for further clarification) and how they are used for access to this advantageous, next-generation project funding.
Conventional loan guarantees are used by most institutional, non-bank lenders as an additional layer of security (as a form of “credit enhancement”) until the loan has been repaid in full — for the “life of the loan.” Such lenders also require a pledge of collateral to secure the Senior Debt via the project’s operating assets — equipment, buildings, etc. Here, with CAP funding we require NONE OF THAT. We can accept either a Bank Guarantee / Standby Letter of Credit (BG/SbLC) or Avalized Promissory Note (AvPN) that goes away upon COD, there is no Senior Debt required (our offered debt capital is closer to mezzanine) nor is there a pledge of collateral via the project’s operating assets.
Instead, the project company or a third party sponsor (definition of the various types of potential sponsors) most often works with a rated bank to transfer completion risk to that institution. Upon COD the guarantee is dropped.
To be clear, a similar type of financial guarantee (a type of Letter of Credit or LC) is widely used in trade finance, an irrevocable “documentary” LC, issued by a bank to a third-party beneficiary and promising to pay on behalf of the transaction originator a specific sum of money against delivery of documents satisfying the terms and conditions of the LC. That is also not at all what we are doing here.
With project finance, the original asset or collateral underlying a Standby LC/BG is “preserved” and must remain “blocked” (the banking terms that means “held for a particular purpose”, in this case, the lender/beneficiary) until successful completion of the project. Upon reaching COD this SbLC/BG is released — technically, it is allowed to expire and thus goes away, with the underlying collateral left untouched. Some purchased SbLC can be cashed or monetized upon expiration, but that’s not what most In3 CAP customers do.
The asset type that can be used is up to the issuing bank and the project owner/developer/sponsor/backer. See below.
Whether a Bank Guarantee/SbLC or Avalized Promissory Note, we use Uniform Rules for Demand Guarantee (URDG, ICC publication 758; see below), and BG/SbLC and confirmed Sovereign Guarantees use the customary SWIFT system for bank-to-bank communication, where SWIFT itself helps maintain the chain of legitimacy, as any bank instrument of sufficient size will tend to attract fraudulent activity. (Example of a common such scam the FBI is tracking.)
We also now accept a Promissory Note (simple template available) that would be Avalized (a stamp or seal) by a rated bank. An SG, BG/SbLC or Avalized Promissory Note (APN) is issued in favor of someone other than the owner of the underlying asset (called the “beneficiary”), collateralizing the asset while allowing for an investment/loan against it. APNs are a special case, as they’re not issued by the bank, and the “exposure” to the bank depends on the asking party’s creditworthiness. More on APN’s advantages here
We pay careful attention to fairness and mutuality in these dealings, and although widely practiced, it is easy to misunderstand and assume there is no protection for the issuer if they are going to issue a guarantee in favor of another party to make sure they do not default. That is simply not the case. The issuer is fully protected under the preferred rules. See Note #3, below.
Further notes on this:
- Ordinarily, MT760 is used to block or set aside cash-backed assets — which does not necessarily mean cash on deposit, by the way, a misnomer — in favor of someone other than their owner. When an MT760 SWIFT is issued, the issuing bank puts a hold on their client’s funds, blocking the client from using them for another purpose temporarily, while the instrument is operative (in force). This arrangement does not USE the funds that are blocked; it is well controlled, and designed to see through the project’s completion, then the underlying asset is released (technically, it is allowed to expire and fall away on the “maturity” date).
- Note that, once issued, if there are no loan funds transferred, then the BG/SbLC or APN has no effective value. In fact, it can be unwound or returned right away, not that anyone would actually do that, having come that far. Just clarifying for bankers that may confuse this SbLC or APN with trade-related transactions (Documentary LCs), where the guarantee serves to protect sellers (exporters) and buyers (importers), where the underlying capital assets are transferred (paid) to the seller upon satisfaction of the terms of the transaction. With a project finance-related guarantee, the instrument is released and returned to the guarantor upon project COD (completion of the project construction/commissioning) per the terms/conditions of the loan agreement.
- Under these banking rules (more here), the guarantee issuer (the project developer/owner/sponsor) is protected against the guarantee being arbitrarily called or used for any purpose other than intended — backstopping the project financing. Thanks to well-proven Uniform Rules for Demand Guarantees, ICC pub. 758 (URDG 758) it is quite safe because it is difficult to make a claim against or “call” (cash or draw on) the instrument and prevail in the courts.
If unfamiliar with how this works, see our Practitioner Series article for a deeper dive into the legal intricacies and independent legal review of this well-proven international venue.
In general, guarantors can be any of the following:
- An involved private party, such as a well-established engineering (EPC) firm or general contractor, technical services or diversified corporation, usually with a commercial interest in the project. Offering a modest equity carried interest helps align incentives, but some well-established EPC or general contractor firms do not wish to own an equity stake.
- At large “sponsors” or “backers” such as private family offices (single or multi), dedicated funds, or specialized impact investors of various types. Their guarantees usually involve offering a equity carried interest in the project.
- sovereign governments — typically the Minister of Finance can issue a Sovereign Guarantee (SG) on behalf of the nation’s treasury. Developed countries will not issue SGs (they don’t need to), nor will the poorest (IDA) countries, typically, except when the IMF does not object.
- development finance institutions like Export-Import (ExIm) Banks, regional development banks or multilaterials like U.S. International Development Finance Corporation (DFC, America’s development bank, formerly OPIC & USAID), though such institutional guarantees would be heavily discounted.
More possible sources of a project’s guarantor at our success tips FAQ on sponsors.
More about the underlying rules for such project finance transactions with Bank Guarantees / Standby Letters of Credit, called the Uniform Rules for Demand Guarantees (URDG 758), including legal analysis that compares who benefits and to what degree.
Will it be worth it? What are the tradeoffs?
In all cases with project finance, the guarantor assumes an obligation only if the borrower defaults (material breach of contract following a reasonable “cure” period). In that unlikely event, which really must not happen, some investors or lenders would not “call” (require repayment) of the loan, as the existence of the guarantee enables the parties to work through any issues and, if there is no way to finish the project, come to an equitable solution. In that sense, guarantees avoid or prevent criminal actors and their unethical practices of fraud, malfeasance, money laundering, etc.
Guarantees constitute leverage and can be used to greatly enhance the developer’s credit while qualifying for better investment/loan terms, faster closings, and greater freedoms than could otherwise be afforded without similar accountability / backstop / surety.
More at our Guarantee-based (CAP) funding FAQ on this topic of how developers can be assured that the guarantee will not be called: in3capital.net/frequently-asked-questions/#faq-6 and how the guarantee can be used in3capital.net/frequently-asked-questions/#faq-2
In conclusion, such BG/SbLCs, APNs or SGs they are not for everyone, and also not free to the project owner, with three exceptions: 1) Sovereign Guarantees (not available in all countries), or 2) When a sponsor, such as an EPC firm or general contractor, can be involved as the source of the qualifying guarantee, or 3) When a company issues an Avalized Promissory Note (APN), where the bank providing the Aval views the PN as coming from a creditworthy customer, in which case no collateral is required, and the bank typically does not charge the issuing company for the Aval — or at most, charges a nominal processing fee. But if not creditworthy, the bank will likely say the PN issuer will need collateral as their Aval makes them a likely target in the event of default.
Here is an implementation guide: Nine Steps to Project Fundraising Success using CAP.
How can In3 help a developer secure a guarantor for CAP funding?
We can help arrange guarantees for projects we finance under a Management Services Agreement, with a tightly defined scope-of-work and timetables for each milestone and deliverables. To avoid these service costs, if you are seeking project capital, better to bring forward your own guarantee as part of qualification for CAP funding.
There are no up-front fees whatsoever if developers bring forward the required “completion assurance” guarantee without asking us obtain one on behalf of their project. Our preferred model is direct financing of qualified projects. Toward that result, we have developed extensive tools, templates and other resources available to help coach and guide developers to accomplish this. Start with this 2-page worksheet.
Our In3 Registered Affiliates may also be adept in building your project’s qualifying profile as they have received training via our MasterClass to serve your needs.
For example, we offer sample contractual language to assist you with proposing a financial Guarantee (usually in the form of a Bank Guarantee or Standby Letter of Credit) to firms you are interviewing for handling key functions like project engineering or construction. More at CAP Funding Proposal Builder
Is a capital guarantee right for you?
History shows that it has worked out well for many developers seeking faster, easier and better access to available capital for qualified projects of US$25 million or more.
All that said, we realize CAP funding is not for everyone. Some developers just do not have the patience or drive to explore possible sources of a qualifying completion assurance guarantee, which would be unfortunate (the advantages would far outweigh the costs or effort), but fine. The only time CAP funding does not work — which is the one time that qualification is just not within reach — is when the developer has no liquidity, inadequate credit, and also no possibility of gaining support from a backer/sponsor/senior lender (minimum 30% of the project’s total funding, perhaps delivered in 2 or more tranches or chunks) because there is no contractor or well-established vendor or anyone else that can be involved that would believe in the project. The project is just not solid enough to involve others. Keep going and bring the project up to the standards necessary to gain such backing. Out of time and/or money? That’s a tough spot.
This unfortunate scenario assumes the project is also not part of a public-private cooperation with a national government agency involved that could “sponsor” that way, or some other, creative solution. Is that true for your situation? It is rare, but it happens.
More at options & resources for new In3 Clients
Contact us with questions or for further information on how to take advantage of In3’s Completion Assurance Program to accelerate project finance closings and obtain the best terms.
* “Market failures” in the sense that small borrowers, regardless of creditworthiness, sometime lack access to the credit resources available to large borrowers. (More at article or original paper at EconBiz.de archive.)
Difference between a Bank Guarantee and a Letter of Credit (LC or Standby LC / SbLC) on Quora, but in the US and most developed economies, a BG and SbLC are effectively the same thing. As stated above, UNLIKE trade finance, that uses these instruments to guarantee payment upon receipt of goods, In3’s CAP funding uses a BG/SbLC or APN to ensure completion of a project’s construction and commissioning to commence commercial operations. In other words, it is designed to prevent fraud.
