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Comparing Bank, Company and Sovereign Guarantees
Three options for suitable Financial Guarantees (definition, in contrast to a traditional Loan Guarantee), each type described below:
Option 1: Bank Guarantee/Standby Letter of Credit (BG/SbLC; verbiage essentials)
Option 2: Company-issued guarantee as a simple Promissory Note with bank “Aval” (AvPN), or
Option 3: Sovereign Guarantee from a country’s Ministry of Finance (SG).
Which one is best for your situation? Use the comparison to select and take steps to get it done:
What are the relative tradeoffs and requirements for these?
Here’s a summary to help you decide whether to use a Bank Guarantee/Standby Letter of Credit, Company Guarantee (as a simple Commercial Promissory Note) or Sovereign Guarantee. There are many similarities, but also a few key differences. After scanning this technical comparison chart, the article below walks through the top-down approach to save time and ease decision-making:
Comparing Bank, Corporate and Sovereign Nation Guarantees for In3 funding (click chart to enlarge)
Why use a project finance Completion Assurance Guarantee at all? (article)
When CAP funding’s guarantee is your best or only option (infographic)
How to obtain a Financial Guarantee or Partial Guarantee
NOTE: If you are effectively out of cash, working in a developing country or emerging economy and already have access, or can gain access, to the host government’s Minister of Finance (MoF), and that country still issues Sovereign Guarantees (SGs), best to explore that option first, as SGs are effectively free to developers. See Option #3, below.
If you can afford to hire In3 to arrange your guarantee for you, please read about this premium service here.
Option 1A) If you are part of an established, credit-worthy company, or can involve such a company, ask a rated bank to issue a Bank Guarantee or Standby Letter of Credit (BG/SbLC) using our template.
Sometimes this same guarantee uses a different title, but follows the same wording as our BG/SbLC template, including names like
- Payment Guarantee
- Performance Guarantee
- Blocked Funds …
Note that BG/SbLCs are considered “cash backed” via any of the following assets:
- Public Equities
- Government Bonds or ISIN-registered and rated Corporate Bonds
- Land Holdings
- Corporate Balance Sheet
- Bank Line of Credit
- Minerals, Precious Metals (e.g., gold), Gems, Artwork, or other collateral with recent appraisal.
The phrase “cash-backed” is a misnomer. Well-established customers may only need to refer to the company’s assets on their balance sheet, not actual cash on deposit. Explain to your banker(s) the purpose of this guarantee (project completion assurance via an innovative structure), then once you are sure they understand this, request a cost quotation and delivery terms for their BG or SbLC based on our requirements (using well-proven Uniform Rules for Demand Guarantees, ICC publication 758, ideally). What security are they are willing to accept to issue the instrument? The involved bank will honor the BG/SbLC according only to the verbiage (wording), and commercial terms of the undertaking, which is not related to its underlying security.
Fraud Alert: If possible, avoid those who claim to offer BG/SbLC “leasing” — especially if they charge fees ahead of instrument delivery or if the proposed issuing bank is one of the ~20 presently blacklisted. Some of these banks and providers are conducting a fee scam, and use various techniques to defraud those unaware of such scams. Others simply overplay their hand and do not deliver the promised value. Search the FBI’s Internet Crime Complaint Center (example of fraud with SbLC), in the US State of Florida, or if you subscribe to LinkedIn, use our Affiliate’s Scam Alert group here. If you are unsure, ask us.
How do you know if you are dealing with a “real” bank? Usable instruments can come from almost any duly registered, legitimate bank. The larger the better, of course, but we do not require a Tier 1 global bank. Some smaller bankers, even if not rated, can deliver an acceptable instrument for the sake of CAP’s project finance, but unfortunately there are also numerous unregistered, self-described as “privately owned” or “fully independent” banks, typically focused on cross-border trade finance (Documentary Letters of Credit, but in reality they are blacklisted, and they tend to attract “providers” that take advantage of the more permissive regulatory schemes in certain countries to mislead would-be customers, charging a more modest fee than Tier 1’s but not delivering the expected instrument value.
Once a draft instrument is obtained and sent to us, we can then quickly review/approve that bank’s BG/SbLC verbiage along with the other project essentials.
How? Download and fill in the basic facts using In3’s MS Word BG/SBLC template to ask your bank to add their contact information, and what they will charge (to be sent via MT-760 SWIFT) and to gain our acceptance to any verbiage revisions. Banks usually prefer to use their own format, but the legal venue (URDG ICC 758, for example) determines what verbiage will be used.
Once there is a satisfactory arrangement (no need to sign the BG/SBLC at this time), then send the draft verbiage to us for next steps. Tips on the essential elements of instrument verbiage here.
Option 1B) Obtain a Financial Guarantee “Sponsor” / Backer / Lender
If instead you are an individual, or have no operating history or access to assets your selected bank will accept, you will want to align incentives with a “sponsor” (definition).
How? Consider potential sponsors that would have an interest in the project such that they could be willing, if properly approached and incentivized, to issue an enabling guarantee. Financial guarantee sponsorship via a well-established vendor, stakeholder or like-minded (mission-aligned) “third party” is our #1 success strategy for clients that lack financial depth on their own.
Such backing is most commonly obtained via a well-established (but not necessarily the largest) EPC firm, general contractor, OEM, integrator, or other vendor, that stands to benefit from receiving the contract from the developer, offering an inherent incentive for agreeing to bring forward a financial guarantee. The project’s developer can skillfully raise this point as part of contract negotiations, being careful not to overpromise (at first, do not tell the contractor/vendor they have secured their contract) until this completion surety arrangement can be confirmed.
Step-by-step guidance to gain a financial (completion assurance) guarantee sponsor
Two subtle and important distinctions about this request — PLEASE READ:
- This financial Completion Assurance guarantee is unlike a traditional loan guarantee (used as credit enhancement for the borrower, as it stays in place during the life of the loan) because, in this case, the purpose is to ensure project completion and commissioning — it goes away once the project reaches Commercial Operation Date (COD), at which time the guarantee is allowed to expire.
- Most EPC and construction firms already provide completion bonding (or other insurance), making it important to help them understand and appreciate their upside benefit from playing this expanded role. You may need to offer them an enhanced fee or other incentive to bring adequate BG/SbLC or AvPN coverage.
Would you like to receive sample contractual language or presentation materials to share with a potential sponsor? If so, request our redacted EPC agreement with the paragraph that covers the guarantee and/or our “EPC/GC/OEM briefing” PowerPoint presentation materials. History shows this communication is tricky, fraught with preconceptions that require a bit of preparation and skill to turn in direction of mutual understanding. Is there someone on your team with the patience and persistence to do this properly?
If not, please consider involving one of In3’s Master Affiliates, all of whom have a track record of success getting sponsors on board. The total cost of financing will not increase substantially with an Affiliate on board, but the odds of success go up immeasurably.
Your team will need to tailor key information to fit with your unique project opportunity and/or co-brand the appropriate slides with In3, to define these and other points precisely.
Sidebar: If, along the way to achieving this goal (a usable BG/SbLC for your project to unlock this advantageous funding), you happen to encounter any of the three challenges listed here, namely (1) No available guarantor has sufficient asset depth for an acceptable pledge of collateral nor capacity to cover the bank’s guarantee fee, (2) What we call “Confused Banker Syndrome“, or (3) The project size is such that the quoted cost of the instrument exceed available cash-on-hand — though most such fees are only a modest influence on the overall cost-of-capital when amortized over the life of the project — then and only then consider the AvPN, Option 2, as a backup plan.
Option 2) In lieu of a BG/SbLC, creditworthy companies can use our Avalized Promissory Note (AvPN)
AvPNs are a relatively new option, so please be advised that, although we are certain that our own bank(s) will accept an AvPN for project funding, we have limited experience with how banks will interpret their responsibility with this request to provide an Aval. The likely advantage, per initial offers made to several In3 clients, show they are effectively free to qualified customers. Just a nominal fee to the party asking for the Aval, assuming that party is reasonably creditworthy and in good standing with their bank. For more on this, see sidebar, below.
How? Download and fill in the In3’s MS Word templates for PN verbiage and RWA Letter and discuss the filled-in but unsigned drafts with your bank or the sponsor’s bank (all templates are available for download toward the top of CAP proposal builder). Then send to us for feedback and next steps.
Sidebar: What do banks charge for an Aval or “stamp” on this simple Promissory Note? So far, bank fees for an aval are substantially less than an equivalent BG/SBLC (in some cases, no fee at all), but the bank’s interpretation of their role and responsibility with providing the Aval may get in the way. Especially with new customers of the bank, if often brings up whether the company issuing the PN is reasonably creditworthy. Of course, the purpose of these guarantee instruments is credit enhancement as well as serving as a completion/performance guarantee (until Commercial Operation Date), so this is a normal part of gaining an issuing bank’s cooperation. Start by asking the bank that will see this request coming from a trustworthy customer. Even though the company issues this PN, not the bank, the bank’s exact legal exposure is less cut-and-dry. Is the aval simply a statement that their customer is in good standing or are they co-signing for the guarantee in the event of default? This is somewhat arbitrary (a matter of the banker’s opinion, geared toward who is asking), so we recommend that you present the bone fides of the company — audited financial statements, if available — get get their proper reaction and cost quotation.
Please let us know what you learn when you ask a bank to “avalize” (stamp) our simple (1-page) Commercial Promissory Note.
Option 3) Involve a Sovereign government’s Guarantee (SG).
How? If an SG may be within reach from the government’s Ministry of Finance (or authorized/mandated alternative agent that ties back to the country’s national treasury) then download and fill in the appropriate MS Word templates for SG verbiage and Verification Letter, even if initially unsigned, then send to us for next steps.
SGs do sometimes get caught up in politics, and are increasingly rare in this time of COVID. If the government supports the project(s) you wish to finance, but there is no Ministry of Finance SG available, consider Option 1B, above, where the “sponsor” is the government itself. See Sidebar:
Sidebar: When there’s government support for proposed projects, but issues with MoF authority to issue the required guarantee, an alternative to the SG is to ask the MoF to direct a bank to issue a BG/SbLC or Avalize In3’s simplified Promissory Note (AvPN) instead, the previous two options, above. This results in the government’s backing of the project (whether or not a formal public-private partnership), using its good faith and credit in the eyes of the issuing or avalizing bank, bypassing politics, IMF restrictions, or a host of other roadblocks that governments sometimes encounter.
No access to the MoF, working in a country that can’t issue an SG, or working with projects that the government won’t sponsor? No problem! Find a different sponsor.
Just can’t figure out how to get a sponsor on board? If your project fits our “sweet spot” and offers positive social and/or environmental impacts, we may be able to assist with a premium “done for you” (DFY) service. Note that this entails at least some cash on the line prior to closing. More
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