The advantages of obtaining a completion assurance guarantee, either issued by a bank, private party or sovereign government, far outweigh the costs. Funding is not only more flexible but also more predictable, with faster closings, and available at more generous terms.
Only two types of guarantees typically do not incur up-front fees for the developer — Sovereign Guarantees (with rare exception) and a Bank Guarantee issued by a private party, such as a well-established EPC (Engineering, Procurement & Construction) firm, General Contractor, equipment supplier, integrator, or other stakeholders as sponsor. This article explains how to obtain and use a either a Bank Guarantee (BG), Standby Letter of Credit (SbLC are most widely used), endorsed Promissory Note (with a bank’s “aval” or AvPN) or Sovereign Guarantee (SG) in practice.
“Fundraising is an art form — with loan guarantees, it becomes more of a science — much more predictable.”
– Daniel Robin, In3 Capital Group managing partner
What’s the difference between a Sovereign Guarantee and a Bank Guarantee?
A Bank Guarantee (BG/SbLC) is a strong option when a sovereign government (Minister of Finance) cannot or will not issue a Sovereign Guarantee (SG). SGs can be tricky, depending on the government itself and access to the appropriate government contacts.
NOTE: Developed countries will not offer Sovereign Guarantees because the government simply does not need to. Private-sector infrastructure projects are already obtaining financing at favorable rates, so they need not partner to make that happen.
Bank Guarantees, by contrast, can be delivered more reliably when there is either a “sponsor” with some form of bankable assets that can be “pledged” or some seed capital available to cover the bank fees. Such fees vary widely; ask your bank. The fee is only needed to begin the process, then is reimbursed out of investment proceeds.
Why bother obtaining a guarantee at all?
This is worth careful consideration because the benefits of using either an SbLC or other financial instrument far outweigh the time, effort or costs involved, as extremely affordable capital can be realized (e.g., as low as 3% APR for up to 25 years, based on SONIA + 2.5%) quickly, reliably, and with the flexibility to finance up to 100% of the project at any reasonable stage of development.
How to obtain a Bank’s Guarantee
First, consider what party or parties have an interest in the project such that they could be willing, if properly approached, to post a Standby Letter of Credit (SBLC) on behalf of the project using a Bank Guarantee memo called MT-760, which can be sent directly from one bank to another via the Swift system.
Second, select a major bank, usually one with a reasonably strong credit rating, preferably that has registered via SWIFT RMA or RMA Plus. We use mainly Moody’s for bank credit ratings. For BGs, the central bank or national banks, or some larger international banks (with US or European affiliates) usually have the asset depth needed for major infrastructure projects. The selected bank does not need to be local to the project.
A copy of the SbLC language to be used in the SWIFT notice can be sent to us for pre-approval. This is recommended because the wording does matter (ask us for a template of sample verbiage), then the actual instrument will always be sent via SWIFT MT-760 to our underwriters to complete the transaction. More
* SWIFT provides a secure network of ~10,000 financial institutions in something like 212 different countries. These SWIFT-registered institutions reliably send and receive information about their financial transactions. More at swift.com
The rules governing capital guarantees used for project financing transactions are called the Uniform Rules for Demand Guarantees or URDG, International Chamber of Commerce (ICC) public number 758, well-tested 2010 edition.
Will In3 Capital Partners accept lower-rated or smaller banks?
Our partners have existing relationships with hundreds of banks. When asked to finance larger projects ($75 million and above), we can justify establishing a new SWIFT banking relationship, and we can also then overlook a bank’s less-than-perfect credit rating. Smaller projects are more difficult to justify. Ask us if you’re not sure. In some cases, a smaller or lower-rated bank branch can use a larger Confirming Bank or work with our partnership with EBRD to make the transaction possible.
What makes using a financial guarantee worthwhile?
See our investment terms & conditions for the quantitative aspects of an acceptable project or portfolio to be financed — minimums do apply. We call this our Completion Assurance Program (In3 CAP) with four simple cornerstones — size ($25 million or more), space (more than 30 qualify), stage (almost any — no need to be shovel-ready) and surety. more
Project finance benefits from having a bank take on the risk of default as that makes due diligence far less onerous and thus the terms, requirements and timing far more predictable. We will close on projects that are pre-qualified (with an acceptable Financial Guarantee) within 30 days.
Full “inception to completion” process steps, a 1-page technical roadmap.
This information is part of our briefing materials, available to qualified project developers and their authorized agents for review. Visit In3 Capital Partners project finance library of Tools, Guides and Templates to go here to get started.
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