Types of Non-Cash Assets that can be used for In3CAP Security

Assets or securities that may be used as short-term security deposit for a Completion Assurance Guarantee (CAG):

1. Buildings, commercial real estate, production facilities, … or other tangible assets
2. Rare metals (silver, platinum) or gemstones with proper chain of custody and appraisal
3. Fine Art
   
   Securities:
4. Public Equities
5. Bonds, ISIN-registered and rated, corporate or government
6. MTNs – Medium-Term Notes
7. Gold with a Safe Keeping Receipt (SKR)

Which ones are best? The acceptability of the proposed asset as collateral for a Standby Letter of Credit (SbLCs are the most widely used), or other bank-involved instruments, is entirely up to the banker you approach.  We don’t even need to know what backs an SbLC or any of the other financial instruments that are acceptable forms of CAP funding Security — Sovereign Guarantees (SG), Bank Guarantees (BG), company-issued Promissory Note with bank endorsement (AvPN), etc. More at guarantees.

How to apply for a guarantee with your bank: To get your banker on board, you may need to explain that this guarantee is NOT for trade finance purposes (it will not be cashed to pay any seller; more on this) but instead serves as completion security during construction for project finance. If the banker is not aware of your intent, they might say that only cash on deposit or a line of credit is usable as collateral, a common misperception.

Terminology check: the banking phrase “cash backed” means the bank is required to use cash in the extremely unlikely event that a project finance-related guarantee gets called (in practice, we won’t need to call any guarantee because other solutions exist, even in worst case scenarios like developer fraud), but the underlying value of collateral or the applicant’s balance sheet depth need not necessarily be in the form of cash. This phrase is, at best, misleading. The bank’s accounting may differ from yours. An independent appraisal or other evidence of asset value can help.

Key idea: The bank’s customers are not necessarily responsible for bringing cash (a line of credit or cash on deposit is much more valuable as CAP security, compared to any bank instrument or direct securities), but the bank issuing or endorsing the instrument has to consider all risks, perceived or actual. Build a relationship with bankers that want your business. Smaller, regional banks and credit unions are sometimes the better option. Show up with strong evidence of asset value — describe the reputation of the appraiser, or rating agency, or offer ownership proof, chain of custody records, receipts, etc.

Of course, no banker would object to having cash on deposit, but this is a misperception because (to reiterate), if you had cash, you could use that directly (as a security deposit) instead of an SbLC, as it is relatively more valuable — cash can be leveraged more than either an SbLC or direct securities. So, if your banker or the sponsor’s banker insists on needing cash or equivalents, you can point out that with cash, you would get far better investment terms and would not need the banker at all. Compare CAP’s cash deposit to SbLCs

For example, a 50% SbLC is roughly equivalent to 33% cash surety deposit. Compare how much leverage can be used by type of security for CAP funding

More about Communicating with Bankers.

Making Sense out of these non-cash Asset Options

The first 3 asset types, shown above, usually require professional appraisal and chain of custody records.  The last 4 types – Bonds, MTNs, public equities, or gold – do not require a bank-issued SbLC, and can be used directly as a guarantee for In3CAP funding.  

Note regarding BONDS: There are many types of bonds — government or corporate, both are fine if the bond is rated and considered a form of debt security. But there are also completion bonds, surety/insurance, interest income bonds, revenue bonds, etc., that are not usually rated, and we cannot use as CAP Security. Thus, whatever the source (issuer), we really just need to see a sample of the bond’s wording to determine if it can be used to arrange and access CAP funding.

Balance Sheet depth and credit history: When the guarantee applicant is particularly flush, and/or known to the involved banker as highly creditworthy, the applicant’s Balance Sheet may be sufficient for obtaining an SbLC or short-term line (cash loan) without collateral assets. 

New options for CAP Guarantees! Cash or equivalents (a line of credit, funds from a bridge loan, cash on deposit such as in a money market account), can also serve as a counterparty’s “deposit” for 100% funding and still CAP funding can be arranged as a minority carried equity. Cash is not necessary with a qualifying guarantee (CAG), such as a Standby LC (SbLC) or Sovereign Guarantee (SG), or the assets mentioned above, when available and acceptable. Asset-backed guarantees or Securities help preserve cash, neither of which are ordinarily required for this type of SbLC bank instrument.

• When cash is used to secure CAP funding, it is held during the draw period and returned in lump sum with the final drawdown of proceeds, typically 2x-4x the deposited funds.
• Minimum cash deposit is ~25% of the total requested investment.
• Draws are faster with a larger deposit — for example, it might take just 10-12 months to receive all the project’s funding with a 50% deposit (2x), but more like 18-24 months with just 25% deposit (4x).
• Also, the negotiated equity arrangement will be more favorable with a larger deposit, though we will not ask for a majority interest or control (majority voting rights), where equity carry ranges from 20-50% depending on the size of the deposit, similar to the “coverage” of a Completion Assurance Guarantee (CAG).

Do whatever works best for you, but note that cash surety deposits have higher value toward negotiated terms than does a bank’s guarantee; cash is incrementally more efficient. Both are equally effective.

Once the Security is released, then that guarantee becomes equity — whatever split is negotiated — in the client company.

Note that In3 does not directly provide Completion Assurance Guarantees to clients; we deliver the vetting and funding when the project owner or sponsor can deliver either a cash deposit (25% or more) or bank-issued guarantee, such as the SbLC (50%-70%, ideally). Larger cash surety deposits as with other guarantees tend to improve offered terms.

We can help pre-qualify a project or portfolio for the best available terms. But to avoid initial fees, facilitating a guarantee or security deposit is the client’s responsibility.

In some cases, when a project or portfolio meets our strict criteria, we can discuss arranging a Done For You (DFY) guarantee, a premium service under Joint Venture agreement, and/or through cooperation with the Impact Guarantee Fund (Press Release) or IGF website.