Bank-endorsed Promissory Note delivers advantages of simplicity and affordability to well-qualified project developers and sponsors
The main advantage of using our Promissory Note (In3’s PNs are simple, 2-page, company-issued guarantees): it decreases or eliminates the need for collateral and bank fees for creditworthy issuers. Banks typically charge 0.5-3% of the face value for the more common Standby Letter of Credit (SbLC) as a bank-issued guarantee. They vary widely depending on the bank and the applicant’s standing as a customer.
Finance-related fees can be reimbursed from initial draw(s) of project funding, but that still requires some party — typically the project’s developer, sponsor or other stakeholder — to cover or “bridge” the fee until 30-45 days after closing, which is the upper limit to first draw.
So instead, we have developed an elegant and more cost-effective approach to obtaining a qualifying guarantee using a streamlined Promissory Note (PN) with a bank’s “Aval” or stamp as the endorsement.
PNs with Aval and SbLC/BGs can use Uniform Rules for Demand Guarantees (URDG), ICC pub 758. There are other similarities.
Compare both types of instruments below or with decision-making support here.
Most banks do not charge customers for an Aval; some charge a nominal service fee (similar to a notary or other services). This is because the bank is not taking primary responsibility for the guarantee and has reason to believe the issuer will not default. The PN issuer is usually a private company, and the bank’s customer, while the bank takes secondary responsibility by stamping the PN hardcopy “per Aval”. This confirms that the issuer of the PN is in good standing with the bank and reasonably creditworthy. If that is not the case, the bank will either not agree to provide the aval at all, or would request some form of collateral. If the banks seeks a higher fee, ask them why. Compare that to a BG/SbLC fee, or ask a similar bank (with equal or better credit rating), and go with the instrument that’s least expensive.
One of the advantages is that AvPNs come from the project’s developer or their sponsor as a company-issued guarantee (sometimes called a corporate warranty, in the form of a commercial Promissory Note), NOT from the bank. There is no SWIFT message to transmit the instrument, so they cannot charge a SWIFT fee for that — the instrument is physically stamped and then sent via hardcopy only. An RWA letter from the bank’s officer expresses the bank’s intent, followed by bank-to-bank confirmation.
Although usually far less expensive, with none of the baggage of a BG/SbLC, avalizing a Promissory Note does not make the issuer more creditworthy. The aval is not a form of credit enhancement. Still, all of our partner’s funding banks will accept this instrument once the developer project/portfolio is otherwise pre-qualified for our fast and advantageous funding.
What other advantages does an AvPN have over a Bank Guarantee / SbLC?
If a BG/SbLC or SG approach is not workable, this AvPN alternative method may offer savings in time, money and effort. It offers mostly the same terms, procedures and utility as a BG/SbLC or SG, but with the following likely advantages for qualified companies:
- Fresh start: Some bankers get confused by the versatility (and occasional fraud) of the BG/SbLC, as they are often used for commodity trade finance transactions, which function quite differently from a guarantee used for project finance security. Banks are often reluctant to issue their guarantee for a variety of reasons, at first, while for those that understand what it means (because they’re already familiar with an aval), this AvPN approach has none of that baggage. See Why are bankers often hesitant?, below, for more on this.
- AvPN’s cost less than a Standby Letter of Credit / Bank Guarantee (SbLC/BG) to qualifying customers: the bank’s Aval fee may be substantially less than with a BG/SbLC approach. The rationale here is that a company-issued commercial Promissory relies to a greater extent on the credit rating of the company offering the guarantee, or their balance sheet, operating history (which would usually require financial statements or other evidence the bank will accept), and overall standing with the bank than the bank’s guarantee would. Banks usually require separate collateral for a BG/SbLC and other bank-issued instruments, but the bank that provides the Aval may or may not ask for collateral, given their secondary role in backing the PN with their added Aval.
- No collateral required for creditworthy issuers: An AvPN will not normally involve blocking (reserving) any cash-backed assets with the bank because it is not a bank-issue guarantee. How the PN issuer handles this accounting is up to them. PN issuers usually count the note as a contingent obligation, and once they understand how they stand to benefit, coupled with their limited exposure (only in the event of contract default, effectively fraud, in the project Loan Agreement), they come to accept this approach, presuming the project(s) involved are solid.
If the avalizing bank does ask for collateral, or presumes that they are effectively a co-signer for the PN, that’s usually a sign or signal that they do not see the PN issuer as sufficiently creditworthy. Do what you can to persuade them that
(a) The issuer has the financial depth to make this promise without any real possibility of risk of their default,
(b) The exposure is nominal to the bank, therefore, as they are in secondary position, and
(c) With a project asset being built with the funding, under URDG ICC 758, the burden of proof of wrongdoing would fall to our Family Office investor (the instrument’s Beneficiary), limiting the risk of making a claim to conditions of fraud or gross negligence by the developer following a lengthy cure period. If that were to occur, the project’s assets would become the collateral, and worst case is that the developer would opt out (having left the country, or whatever) to enable another party to step in and finish the project. Conclusion: if the PN issuer is indeed strong enough financially, that virtually eliminates the bank’s role in covering the PN in the event of default. In other words, the PN issuer is on solid ground making this promise, and the bank will not be hung out to dry. (If those two assertions are not based in fact, the AvPN approach is not going to solve the underlying issue in any case.)
Making any claims against the instrument (drawing on or calling the AvPN) remains the absolute last resort. We have never called a guarantee in all of our history and do not intend to start now. Doing so would be a sharply negative reflection upon everyone involved … would end up in the courts. It must not and will not happen.
The essential requirement is that the PN issuer asking for the Aval must be a valid customer of the bank that is asked or of their own bank (for bank-to-bank confirmation) and have long-established banking relations. If that party is used to being supported by their bank in multi-million dollar transactions, that can help leverage project financing for the current and future transactions. The difference with CAP is that we only seek completion assurance — the guarantee is allowed to expire once the project reaches Commercial Operation Date (COD).
Note: Be careful not to pivot too soon to an AvPN without giving adequate attention to the BG/SbLC or SG route. The grass always seems greener … some banks will not know precisely what you are asking (even if they pretend to) or will simply say “no” to an AvPN, at first, to avoid having to think, or in hopes of saving both parties frustration. Do not accept the first no, but instead gain precise facts (not interpretations), and inform yourself of why they are objecting, even if they won’t tell you directly, by reading further.
Why are bankers often hesitant to Avalize PNs?
Bankers are often hesitant, at first, due to fear of making a career-limiting mistake. That can be quite pungent. The real reasons may be hard to detect, based on their history or resultant organizational culture’s established policies to avoid any exposure whatsoever. They might also say “no” because (a) They have been burned before, and have become irrationally cautious, coupled with (b) they do not stand to earn much from the transactions — banks cannot justify sufficient fees from an Aval to make it worth their while, compared to other services. They have to make money for the bank some other way. But that said, the more common reason with most banks outside of the EU is that they often don’t know what an Aval is, and inherently mistrust, resist, or defend against (reject) what they don’t understand.
Institutions familiar with the fraudulent use of BGs and SGs often go into full “prove that you and all your counterparties are real before we will dignify your request with a response” — that is, before they will treat you with respect. If the current bankers are giving you the run-around, demonstrate to them that there is a reasonably creditworthy PN issuer involved (if they already know of this company, that tends to make things go more smoothly). How? Have the PN issuer provide them with audited financial statements or other bone fides — whatever helps them conduct basic KYC and satisfy compliance requirements — usually calms their nerves and gets them to listen to reason.
But if the PN issuer is not known to be sufficiently creditworthy, the bankers will assume a default event is possible that would leave them hanging. The reasons mentioned above sometimes affect banker cooperation even when the PN issuer is reasonably creditworthy. This undertaking is more secure than many bankers realize. Staying in this conversation, showing poised, calm and persistent assertiveness (pushing too hard can appear to them as desperation, even if it is entirely born of confidence) will tend to win management support, even if the first “no” is simply a knee-jerk reaction. Once the bank agrees to this, requests for subsequent projects go much more smoothly.
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