Sovereign Guarantees & Verification

Definition: Broadly, Sovereign Guarantees (SGs) are given by host governments to assure project investors that the government will take certain actions (or refrain from taking certain actions) affecting the project. For project finance purposes, an SG serves as a financial guarantee, transferring risk to the government in the event of default, usually as part of public-private cooperation (such as a public-private partnership) in line with policies, initiatives, mandates or particular goals of that country.

Governments will want to issue an SG for the full project’s budget (total costs) when they have confidence in the private-sector developers and when that SG will stimulate and accelerate investments in their country. Often government agencies will also want to obtain the benefits of the project(s), once operational, such as electric grid stability, energy, food and water security, affordable “social” housing, or other infrastructure.

By contrast, developed countries almost never issue SGs for projects in their own country because they do not need to. In more affluent countries, private-sector infrastructure projects are already obtaining financing at reasonable rates (even if the private parties move slowly, trying to take advantage, or change terms unexpectedly), so the government need not partner to make funding somewhat accessible.

But many developing countries and emerging/frontier market host governments will partner or cooperate with private developers to streamline the process. An SG can greatly accelerate fundraising, and is particularly useful no matter what the country’s economic status for establishing new industries, creating jobs, solving local or regional problems (sanitation, healthcare, energy, food, water or housing security) and/or stimulating growth.

How to obtain and use a Sovereign Guarantee

First, check that In3 can fund the project(s), then use our 5-step process to arrange funding with a Sovereign Guarantee (SG):

Request the proposed SG: Download the template to ask the government official (normally the Minister of Finance) for their own version of the SG wording, including the name of the issuing authority, and send that (MS Word or PDF) to In3 for review and approval. The face value of the SG should match the total funding request, 1:1. If the SG receives a discount, we will make up for the gap. The proposed SG doesn’t need to be signed for now.
Commitment Letter: Once the SG wording is approved, In3 then requests that a commercial bank verify/authenticate the SG via filling out this SG bank letter template. The involved bank does not need to be located in the host country. Send the bank’s signed letter to In3.
Authenticate the involved Banker: Upon approval of the bank’s letter, the last step is an Authorization to Verify (ATV) letter from the client to authenticate the banker’s identity and commitment to deliver the SG via SWIFT. Upon successful interaction with the involved banker, we proceed to due diligence.
Due Diligence and offer of terms: Upon completion of Due Diligence, if all goes well, the developer or government would receiving a binding offer of terms, and if agreed, enter a contract for the funding, sign/notarize the agreement, then send the signed SG approved in Step 1 through the bank using MT-760 SWIFT. Hardcopy follows via courier.
Financial Closing & Fund Disbursement: Receipt of hardcopy marks financial closing. Funding flows per established draw schedule then the project reaches Commercial Operation Date (COD) to begin operations. Project commences to begin operations, then the SG is allowed to expire upon it’s maturity date. That’s it!

Gaining government participation

In smaller nations, you may need to use diplomatic ties for a proper introduction, or if you or someone you know has existing connections to high-level government officials (e.g., President or Vice President), that will help you gain proper attention by the Minister of Finance (MoF).

Note that we ordinarily accept SGs issued only by the MoF, or when issuing authority has been given to another agency by law — in which case we would need to show the actual legislation or executive order authorization to our underwriters.

Either way, you will want to first make sure the project(s) are sufficiently beneficial to the country to justify their participation. Once that’s established, you would start with sending the SG template to request a “specimen” or unsigned draft of the proposed SG, showing In3 Capital Partners as the Beneficiary, then once approved by In3, you would ask a commercial bank to issue the commitment described in Step 2.

What if the country cannot issue a usable Sovereign Guarantee? What are the post-COVID-era Best Practices?

If an SG is simply not available from a qualified authority within the government, but that agency is on board and supportive of a project or portfolio, the government can often compel a bank to issue and send the bank’s Standby Letter of Credit (SbLC) instead of issuing an SG. The IMF provides loans to many developing countries, and blocks SGs, while an SbLC enables the country to receive the same benefits provided by In3 Completion Assurance Program™ funding.

SGs are usually free to the developer, but also increasingly uncommon due to COVID-era debts and development pressures. Government leaders that support the project(s) may not want to push the IMF to realize that an SG is not debt (it is a contingent obligation, not a direct loan), but they can still ask a bank to directly issue an SbLC or Bank Guarantee (BG) instead, with the government as the sponsor.

Because of In3’s innovative model, the SG’s Commitment and ATV Letters involve a bank in any case, thus government officials can instead simply request that a local bank use an SbLC backed by the country’s treasury. With an SG, the bank would SWIFT the instrument anyway, bank-to-bank, so this approach streamlines delivering the guarantee instrument while sidestepping any in-country politics or unworkable policies by the IMF or other limitations faced by that country.

The nominated bank can be asked by the government for a draft of the SbLC instrument they would issue (using our template, but on the bank’s letter) if the SG is not feasible. To save time, it is much better to download and send them In3’s pre-approved verbiage template, asking them to fill it in completely, and to adhere to it as closely as possible.

Is the Project Developer concerned about covering the initial cost of a guarantee?

Of the acceptable guarantee options (refer to the aforementioned facilitation guide), the SG and Avalized Promissory Note (AvPN) are the least costly — often free or close to free to developers. The AvPN comes from a private party as the primary guarantor, with the bank adding their seal or stamp as endorsement (writing “per bank aval”) putting them in secondary position as the guarantor), so that is another option for government sponsors, where the bank providing the Aval is not exposed to undue risk.

Visit In3’s Proposal Builder for the proper MS Word templates to save time using pre-approved verbiage.

No guarantee? To evaluate cost/benefit/advantages of CAP funding using a guarantee versus a cash deposit for CAP equity or available alternative funding see compare.

Tips to help arrange a Sovereign Guarantee

If your project qualifies in terms of our 4 S’s — Size ($25 million or more; $50m preferred), Sector (anything that, at least, does no social/environmental harm), Stage (any, in a country without sanctions and with properly disclosed uses of funds), then for Security, the 4th “S,” we may be able to issue a signed Letter of Intent (LOI) or Expression of Interest (EOI) in support of obtaining government participation for one or more projects.

In3’s LOI showing our support can help developers clarify the following with government officials:

Basic terms & conditions for the funding.
Who will do what? Basics of a public-private partnership or at least the type of cooperation that will be required.
Who will own the project(s) and how will the various stakeholders benefit?
How long it will take to receive funding, once the SG is received
The public benefit of the project(s), if any, enabled by the financing.

Wrap-up / Recap

Following the above step to obtain and use a Sovereign Guarantee to finance one or more projects (often an entire portfolio of projects offering diverse forms of public benefit) through In3CAP. This can actually happen quite quickly, once the various parties agree to proceed, using our pre-qualification protocol shown above.

See our investment terms & conditions for the quantitative aspects of an acceptable project or portfolio to be financed — minimums do apply. This is part of our briefing materials, available upon request to qualified project developers and their authorized agents for review.

Finally, note:

In3 offers a set of basic resources for CAP funding: CAP Tools and Resources
In3 also provides free educational guides for developers seeking to use In3CAP funding.
A different set of more advanced guides are available to finance practitioners here that go into greater depth, define terminology used, point to Best Practices for the government side, including this Whitepaper comparing Sovereign Guarantees and Bank-issued Guarantees
In addition, here are the main tools and templates for arranging an SG:
- Sovereign Guarantee recommended verbiage (MS Word template)
- Bank’s commitment letter (MS Word template) to send by SWIFT once the investment agreement has been entered
- Authorization to Verify Letter (MS Word template)
- In3 Capital client history with case studies and testimonials
Questions? Contact us for support

Sovereign Guarantees & Verification