What is a “Completion Assurance” guarantee?
What follows is a detailed explanation of how In3CAP uses financial guarantees to unlock advantageous funding. For a simple version of this introduction, visit About CAP Funding Security Deposits
Unlike loan guarantees, In3CAP’s security deposit serves as completion assurance. Loan guarantees serve traditional funders (mainly institutional lenders) as a way of mitigating credit risk by tying in the guarantor as “credit enhancement” for the borrower due to the structure of project finance, with “recourse” (in the event of default) limited to the project itself.
With CAP funding, however, a short-term “cash surety deposit” or bank-involved Completion Assurance Guarantee (CAG) serves a different purpose. CAGs, like cash surety deposits (neither are payments of any kind) serve as a method of securing funding to develop and build diverse projects. Some of the more important impact projects rely on innovations — necessary that developers think differently about the challenges we face, often resulting in solid solutions to well-understood problem, capable of making a huge difference at scale.
But it is not uncommon for such developers to run out of cash resources before reaching complete “shovel-ready” status (defined a bit differently by each traditional funder), making the process of fundraising slow, expensive and infuriating to developers with scalable, solid solutions that have the potential to close performance gaps with certain of the UN Sustainable Development Goals and achieve spectacular blended returns.
In3 Group, along with its strategic initiative Impact Guarantee Fund, work together with like-minded asset owners to fulfill In3’s investment thesis and deliver critically important capital to fully vetted and prepared impact project innovators.
How Completion Assurance Guarantee can leverage non-cash assets
The main differences between traditional loan guarantees and In3CAP “Completion Assurance” Guarantees (CAGs) are duration and type. CAGs are shorter term — in place only until the project development team delivers the operable project. In that sense, a CAG serves a “security deposit” that offsets some of the risk of non-completion.
CAGs are usually leveraged substantially (~1.2x-4x, depending on the type and size), so In3’s capital partners also have a stake in working out any issues that may arise during construction. Serving as a deposit (not a down payment) means they are returned once the project has been delivered. CAP’s funder takes on operational, technology, political, credit and many other risks as JV equity partners with the developer/owner.
In practice, there will be no need to call any instrument (even though technically CAGs must be callable to satisfy our funding bank), even in the unlikely event of a developer failing to reach operational status, due to abandonment or extreme cases of fraud. There are solutions available to unforeseen issues that cause projects to exceed allocations of time and/or money.
By type, CAGs are financial instruments, such as a Standby Letter of Credit (SbLC) that rely on well-established rules (mainly Uniform Rules for Demand Guarantees, URDG ICC 758 or “Standby” rules ISP98 ICC 590) and customary delivery procedures (usually via SWIFT).
CAP Funding’s unique role in the marketplace
To be clear, this completion security deposit is required to access funds. In many cases, using CAP’s innovative structure, such guarantees enable access to funding that might otherwise be out of reach to project developers and their sponsors, such as 100% financing from a single source, which can be particularly difficult if the project is at a relatively early stage of development, not yet entirely ready to proceed with construction.
There are seven known situations when CAP is likely to be the best or potentially only option for up to 100% mid-market project funding, but still offered at attractive terms and with more forgiving Due Diligence than the traditional route.
The remainder of this article explains
- Definition of this type of guarantee (a CAG), starting with defining what it is not?
- CAG’s purpose: this guarantee is not a traditional “loan guarantee” so why is it necessary at all?
- What types of CAP security can be acceptable? (Use decision-making guide to pick the best option(s) for your situation.)
- Quick guides to getting it done
What it is not: a CAG is not a traditional loan guarantee. Why? Loan guarantees stay in place for the life of the loan, mitigating the risk of default on the loan, 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.
Completion Assurance Guarantees end once the project is delivered — a milestone called Commercial Operation Date or COD. CAGs are also not insurance or bonds (insurance products cannot serve as a financial instrument; more), nor do they obligate the issuer to pay for cost overruns, a contractor that does not perform, nor a host of other issues that can crop up during new project construction.
The issued CAG would sit as a form of accountability for the parties to work together to finish the project. A cash surety deposit of 25%-35% or more can also be used (compare), but CAGs or cash enable the family office funder access to their own capital for covering up to 100% of the project’s costs in exchange for equity.
Nor is it necessary to obtain the type of instrument widely used for commodity Trade Finance, a “documentary” Letter of Credit. Documentary LCs or DLCs are “cashed” (they can only use cash as their basis) upon completion of the trade transaction to pay the seller. Here, a “Standby” or “Demand Guarantee” works 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 acts as a source of assurance, transactional security, or “surety” that the project will be successfully completed and commissioned to begin commercial operations. This is why we refer to it as a type of “security deposit.” In some ways it is quite simple, actually. Most of what we describe here serves as background context for people who are already familiar with such instruments, as they’re thrown off by the fact that once the project reaches this milestone (Commercial Operation Date, or COD) the completion instrument is allowed to expire and is released.
If this elaboration does not seem important to you, stop here, and jump to our Quick Guide stepwise synopsis to help facilitate your project’s CAG.
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, with a traditional loan guarantee as a secondary source for added security (recourse), widely requested by traditional and institutional project funders as a type of “credit enhancement” to offset their perception of risk that such loans have limited or no recourse outside the Special Purpose Vehicle (SPV) legal structure.
Our funding is still “non-recourse,” as per the tradition of project finance, but we are also non-traditional, offering 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 either mezzanine debt or no debt (entirely as equity without asking for majority voting rights), requiring no pledge of collateral as operating security.
Why is this guarantee even necessary? CAP funding’s non-recourse 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 when the developer brings their own security. This capital is a hybrid of debt and equity from one source — a “one stop shop” approach, though we’re fine with other funders in the capital stack, if that’s what the developer prefers — deliver numerous advantages, including that we take out much of the guesswork, making project funding more of a science than an “artful adventure into the unknown”. CAP Benefits | Problems we solve
Project finance usually involves a Special Purpose Vehicle (think of an SPV as a holding company) that cleanly owns the funded project’s assets, enabling project developers/owners to build out qualifying pipelines of projects more rapidly, using the assets of a built project as the basis (whether for a Standby Letter of Credit, Line of Credit, or bank-endorsed promissory note) for subsequent guarantees, when desired.
Facilitating such a guarantee for a nonrecourse loan can be relatively straight-forward or quite a challenge, depending on (a) whether or not your own company has assets (balance sheet depth), or a strong enough credit rating, to involve a licensed commercial bank or credit union, or (b) how you go about inviting a sponsor with financial depth to bring forward a guarantee on your behalf.
There’s another simple reason this guarantee is necessary: our funding partners require it, usually drawing on existing lines of their own commercial credit alongside their own cash holdings to fund new construction of infrastructure projects. This also explains why the funding is drawn down in monthly installments or tranches — to satisfy banker expectations for such new construction, further filtering out fraud, money laundering, etc. More on this at CAP Frequently Asked Questions.
Does it seem, at first glance, like this guarantee is too much work for not enough payoff? It is a sharp learning curve for many, though In3 is set up to make the journey manageable. Keep reading, if you enjoy expanding your knowledge, such as an introduction to the “art and science” of using financial guarantee to secure advantageous project funding at “Obstacle or Creative Opening” (article).
If not, see if you might qualify for In3’s Done-For-You (DFY) security services.
What is the payoff?
The trouble with Project Finance in the current marketplace is getting it secured, contractually arranged, and delivered. You have to choose wisely who to work with, and who to leave alone. By now, our track record gives us an upper hand in pre-negotiating fair terms and conditions with capital partners so you benefit from knowing this in advance. Nobody (including us) likes the “blind alley” that is so typical when dealing with mid-market project financiers that you don’t already know.
In addition, 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 well-informed 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 (a true partnership) 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.
Quick Guide (2-pg PDF) to Securing your project’s Completion Assurance Guarantee (PDF)
Complete Step-by-Step Guide to Securing Completion Assurance Guarantees
Step-by-Step Detailed Instructions
In3 Premium Services to arrange your project’s guarantee
Stepwise Implementation Guide: Complete Steps to Project Fundraising Success using CAP.