What is CAP funding “security” and how does it work?
Click this line if you prefer a simplified intro to Security
Full leverage funding – up to 100% of the budget – is contingent upon confirmation of some form of Security for project completion.
This article is about how to arrange a Security Deposit, providing CAP funding’s assurance of project completion, either …
a) Via your own holdings (company balance sheet, a short-term loan, cash surety or other assets)
b) Via a “sponsor” (such as a mission-aligned vendor or arm’s length asset owner that you could get interested in birthing your project), or
c) By hiring an advisor to help you obtain it.
When In3CAP (1-pg tear sheet) funds 100% of the required capital, and the project developer contributes no unexpended (new) cash, CAP Security provides a proof point that you are committed — that you have (short-term) “skin-in-the-game”. It’s relatively short duration because, like the CAP name implies, we seek mainly to assure project construction completion and delivery (commissioning), filtering out fraud.
Security guarantees delivery of the funding, once contractually arranged, in exchange for your team’s delivery of the operational project, which is how everyone wins: the project company hires and trains workers (often upleveling their skills) and launches operations to generate cash flows, causing an immediate increase in valuation, improving the owner’s balance sheet, creditworthiness, and “bankability” for the beneficial owners, … and of course (then and only then) enabling repayment of the original CAP investment to our funding partners.
When involving a sponsor, that party is usually compensated to align incentives. Some sponsors have goals of their own, so find those motivated to play this role, such as because their assets are presently underperforming and they seek to generate some short-term liquidity at reasonable risk. Otherwise, a conversation to gain sponsorship from an unmotivated party can be like pushing string.
This innovative method of securing project funding provides the committed capital directly to the project’s Special Purpose Vehicle (SPV) bank account per an approved draw schedule, and also demonstrates that the developer/owner is materially “at stake” during construction to deliver on what the project plan documents propose.
The main two Security options are a Standby LC (SbLC) or cash security deposit. Simple steps to figuring out which one is for you. All Security options
Who is this for?
Conventional project finance tends to favor the incumbents — those who have already financed multiple previous projects — while In3’s CAP funding can offer favorable terms to scale rapidly. By contrast, we work with both established and new teams … experienced or first-time developers working in this middle market, even with new and “first-of-a-kind”, innovative solutions.
Be sure you fit In3CAP’s basic criteria, mainly for Sector and Size ($25 million minimum per project or portfolio). Stage of readiness is flexible, so long as you have a provable business case established through identified customers at market rates over time or with a strong purchase contract (offtake agreements) already in place.
How to make Security work
Traditionally, projects developers are required to bring varying amounts of unexpended (new) cash capital — in the form of senior loans, equity investors, tax credits, seed money of their own, grants, or convertible instruments. Such new cash also ensures that the project owner is taking on a meaningful share of the risks longer term.
But for CAP funding, an innovative structure allows clients to consider sourcing as short-term Security any of the non-cash assets shown at Types of Non-Cash Assets that can be used for In3CAP Guarantees. This is thanks to the In3CAP’s model.
For developers or sponsors with a strong balance sheet, the involved bank that is asked to deliver a guarantee instrument (Standby LCs or SbLCs are most widely used, second only to cash surety deposits) will not be required to provide any assets as collateral. An SbLC, Bank Guarantee (BG), or Avalized Promissory Note (AvPN) would be allowed to expire once the project is built and has reach Commercial Operation Date (COD).
See SbLC tips. To decrease the required face value of such instruments, consider using a lending partner or other form of cash contribution. When that’s possible, it helps to proportionately reduce the amount of security needed for the rest of the project funding.
For example, if a project requires $100 million in total funding, but $35 million of it has been (or could be) arranged via one or more of the above sources, such as a senior loan, then the remaining $65 million from In3 CAP would require about one third less Security. Cash surety deposits are the most leveraged (25-35% of total funding), then an SbLC, then direct Securities or a Sovereign Guarantee are closest to 1:1.
But to keep things relatively simple, with CAP funding, developers can arrange 100% financing without the need to give up majority control. Why? It is a quite common scenario with developers who expend quite a bit of effort and available cash capital into a fine project’s inception or “origination” — figuring out the financial feasibility, getting clear about engineering/design for accurate cost estimates, as well as studying the market to forecast achievable income, operating margins and anticipated cash flows. But traditional funders want more — they seek at least 15-25% “new money” for expansion projects and upwards of 35% for greenfield (no prior operating history), which knocks out most projects until they can secure an equity partner or some other source of additional investment.
With In3CAP funding, you do not need to invest any additional cash if you bring a qualifying project with short-term Security that you facilitate. Further, we don’t require complete project readiness to “turn dirt.” We can accept earlier states of readiness, so long as there is a plausible case for low to zero commercial risk. We often fund the remaining “pre-construction” development costs, and can allocate capital based on initial estimates, reserving some as “contingency” in case cost estimates turned out to be low.
For less than well-qualified clients, the key to CAP is often discovering creative options for this Security, keeping an open mind, perhaps using unconventional, “out-of-the-box” thinking, if you and your team do not already have access to assets or sufficient balance sheet depth to readily bring your own Security.
Note: Beware of fraudulent Standby LC “providers” operating fee scams … work only with those who are authenticated (tips)
The Security typically falls away once the project is built and commissioned to begin commercial operation (called Commercial Operation Date or COD). Top three forms of Security used by clients are (in this order) 25-35% cash Surety deposit, 50-75% Standby Letter of Credit, or 100% Sovereign Guarantee.
It is not uncommon for developers to need support with facilitating their own project’s Security. For a complete list of the solutions, with the first 3 facilitated by you, and the last 3 arranged by us under a Management Services Agreement, “done for you” agreement, visit our Security Solutions Center.
See also these Simple Steps to get started.
What’s new in the world of CAP Security?
There are a lot of ways to make this Security, and well worth the effort. Seems like nobody can be our funding’s advantages, flexibility and affordable terms. For example, if the face value of security required is out of reach, the total amount of funding and proportionate security required can be reduced in a variety of ways, such as via either additional funds (leveraging some debt, tax credits, grants, etc.) or via an innovative Ground Lease structure, if the project site is close to a major US city. Any of these will generate new, “unexpended” cash and lower the bar for Security.
For the most qualified projects, when developers go to great lengths eliminating almost all the risks, using the highest standards for design/engineering, accounting, planning and building a top team for execution, we can also reliably arrange Senior Loans once CAP equity has been committed (more), or a Done For You (DFY) guarantee. Know more
Action Plan: Getting Security Arranged
You contact In3 with a project in our Focus Sectors, and if you seek CAP funding, propose the form of security (SBLC, cash, or another form) and its Face Value relative to total funding you require. The form of security determines next steps. Get started now with these simple steps
Not clear about when Security is needed? CAP funding’s model uses security of some form to arrange advantageous funding for any new/expansion, retrofit or refurbishment construction project in our sweet spot, $25 million or more ($50M preferred). To gain CAP funding’s advantages, clients are asked to facilitate or procure at least one form of security that assures project completion and delivery — as mentioned above, that’s almost always a cash surety deposit or a bank-involved Standby Letter of Credit (SbLC).
- Compare SbLC with cash deposit — discover which one works best for you
- Can’t bring either a cash deposit or SbLC as security? There are additional Security options, depending on your location (some Sovereign nations can offer state guarantees), access to non-cash assets, bridge loans, or potential sponsors, and/or if your banker knows you are creditworthy. Browse all security options
- What is a “Sponsor” and How might I obtain one?
Know more about “Completion Security Deposits” (CSDs), an asset-backed financial instrument (or can be uncollateralized with sufficient asset depth) such as an SbLC or more highly leveraged cash surety deposit.
Check out these Practical tips for sourcing CAP Guarantees or CAP funding’s Frequently Asked Questions
Still unclear? Request assistance from In3’s team or your In3 Affiliate?
Why CAP’s funding is the best option for most mid-market projects
About CAP funding: CAP’s 100% funding without a loan to repay, within reach at any reasonable stage of readiness is probably unique in the capital marketplace. It is the only project funding that uses security just until all the funding is received (in the case of a cash deposit), or until the project is delivered (when using financial instruments like a bank-issued SbLC or privately issued AvPN). “Delivery” occurs once construction is complete and the project is commissioned to begin commercial operations. That milestone is called Commercial Operation Date (COD), when annual CSDs are then allowed to expire on their “maturity date” and fall away.
If you opt to use a cash deposit, it is returned in lump sum on the final drawdown of funds, and can then be re-purposed for more project funding or other uses as you wish.
That’s it! Questions? | Indicative Term & Conditions | Finding a “sponsor” | Done-For-You Solutions
Everyone keeps their eyes on the prize of a completed project. Projects then begin to generate cash flows for the equity partners to repay the investment. The exact equity split is subject to negotiation, depending mainly on how much leverage is used with the CSD — which can be as much as 3-4x with cash surety.
How to get started | Register your project once ready for In3 vetting