Advantages of a Bank-endorsed Promissory Note as a financial guarantee

Bank-endorsed Promissory Note delivers certain advantages to well-qualified project developers and sponsors

Although rarely used, here are the main advantages of using our Avalized commercial Promissory Note as Security: 

1. Clean start: In3’s PNs are simple, 1-page, company-issued guarantees that do not have the “baggage” of Standby Letters of Credit (SbLCs), which can confuse bankers, or seem like a risk (a “career-limiting move”) to issuers that only see the wording of the SbLC without the commercial context.  SbLCs are quite versatile (and occasionally originate from fraudulent “providers”), widely used for commodity trade finance transactions, but for In3CAP project finanace, function quite differently. 
2. Not issued by a bank:  AvPNs are bank-endorsed guarantees, unlike the widely used Standby Letter of Credit (SbLC), which is a bank-issued guarantee, similar to a Bank Guarantee (BG).  Bankers are often reluctant to issue their guarantee for a variety of reasons (mainly, not wanting to make a costly mistake), especially at first glance, while for those that understand what it means under the ICC rules (URDG 758), an Aval on a company-issued commercial PN will bring up a different set of questions, but not cause the banker(s) quite so much fear and anxiety.  
   The questions that will likely arise are because an “Aval” is not widely understood (usually only bankers outside of the US are familiar), so be sure to ask early on if your bank can provide one.  International banks, from Canada to Europe, Asia/Pacific, and many of the larger ones in Africa, are thus the better choice.
3. No SWIFT fee for the AvPN instrument may save 0.25%-3% of the face value. Finance-related fees are reimbursed from initial draw(s) of project funding, but that still usually requires some party — typically the project’s developer, sponsor or other stakeholder — to cover or “bridge” the fee until 45-60 days after closing, the typical timeframe to first draw.  Instead of SWIFT, the AvPNs hardcopy is delivered via courier to the Beneficiary bank, and there is a bank confirmation letter that can be sent by SWIFT, so fees are still open to the banker’s interpretation. 
   But generally, if the party asking for the Aval is creditworthy in the eyes of the bank, the AvPN will cost less than a SbLC/BG to qualifying customers.
4. The AvPN may not require specific collateral: The rationale here is that a company-issued commercial Promissory Note relies on the credit rating of the company offering the guarantee, or on their balance sheet and operating history (which would usually require audited financial statements or other evidence the bank will accept), and the issuer’s overall good standing with the bank.  Banks usually require separate collateral for a Bank’s SbLC, but the bank that provides the Aval may or may not ask for collateral, given their secondary guarantor role. It just depends. You would need to ask so the involved banker can make this judgement call.  

There is one significant trade-off, however:  a Promissory Note (PN) with a bank’s “Aval” or stamp is less often used by bankers compared to Standby LCs. If you are certain your bank can provide the Aval, the above points to the next conversation:  whether the party requesting it is creditworthy in their eyes. 

Most banks do not charge customers for an Aval; some charge a nominal service fee (similar to a notary or other services) or for the bank letter that states the AvPN will be confirmed using SWIFT.  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, as well as the bank’s customer, while the bank takes secondary responsibility by stamping the PN hardcopy “per Aval”.  The aval thus 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 bank seeks a higher fee, ask them why.  Compare that to an SbLC SWIFT fee (MT799 and MT760 plus hardcopy), or ask a different bank with equal or better credit rating, and go with the instrument that’s least expensive.  

Part of the reason this instrument is not well understood by bankers is because it is a private company-issued guarantee (sometimes called a corporate warranty, in the form of a commercial Promissory Note), NOT from the bank. The instrument is physically stamped and then sent via hardcopy only, with SWIFT used only to confirm or otherwise correspond on a bank-to-bank basis. 

Procedure:  Once a banker at a reasonably strong commercial bank agrees to provide the aval, the steps are

1. Draft the Promissory Note to be avalized:  Use In3’s template to fill in the various blanks (information shown in highlight), and clean up any extra letters or space as an unsigned “specimen”.
2. Make arrangements with the banker(s):  Present your project’s fundraising target and let them know that it fits In3’s “sweet spot” (optional:  ask In3 for an expression of interest as evidence of this), then ask the bank’s officer to explain their procedures, timing and any fees.
3. Ask for the bank’s letter to verify the arrangements:  Ask for the bank’s Confirmation Letter, followed by an Authorization to Verify (ATV) letter.  This letter is effectively a letter of intent.  Send the package of 3 documents — AvPN “specimen,” signed Confirmation Letter, and signed ATV letter — to In3. 
4. Project Vetting by In3:  Once accepted by underwriting, we will request your project’s complete package, including an assembled data room, if available, then launch our financial due diligence. This typically takes no more than 2-3 weeks to complete.
5. Binding offer of terms & conditions:  If all goes well, a binding offer as a term sheet or the definitive investment contract will be arranged for the proposed funding. Only then does the bank need to provide the Aval, sending the finalized AvPN hardcopy via courier, confirmed via SWIFT, as the last step before closing.  The investment agreement is signed and notarized, which can be made available to or referenced by the avalizing bank.
6. Financial closing:  Receipt of the AvPN hardcopy marks financial closing, with funding draws following the pre-approved monthly draw schedule, commencing per the investment agreement.  The project construction completes and is commissioned to begin commercial operation, at which time the AvPN is allowed to expire on its maturity date.

To be clear, although usually less expensive, with none of the baggage of a BG/SbLC, avalizing a Promissory Note does not make the issuer more creditworthy.  The aval does not enhance the issuer’s credit.  Still, our partner’s funding banks will accept this instrument once the developer project/portfolio is otherwise pre-qualified for our fast and advantageous funding.  

PNs with an Aval and SbLCs can both use Uniform Rules for Demand Guarantees (URDG), ICC pub 758.  There are other similarities as well.  Compare both types of instruments below, or also compare with Sovereign Guarantees with decision-making support here.

What reassures the bank we will not call the AvPN?  Making any claims against the instrument (drawing on or calling the AvPN) remains the absolute last resort.  In practice, we would have no reason to do so.  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 happen, and in practice, there would be no reason to call it.  We find alternative solutions.

Recap:  The essential requirement is that the involved bank offers Avals and that the PN issuer asking for the Aval must be a valid, creditworthy customer of the bank usually with long-established banking relations. To be blunt about it, if the issuing party is used to being supported by their bank in multi-million-dollar transactions, that can help leverage project financing with an AvPN or SbLC for the current and future transactions.  The difference with CAP is that we only seek completion assurance — a security deposit, where 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 cash surety deposit, SbLC, SG, or direct use of securities (a rated bond, MTNs, gold with SKR, or public equities) options.  Why? 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; instead gain precise facts (not interpretations), and inform yourself of why they are objecting, even if they won’t tell you directly at first.  Persistence often pays off.

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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