FAQs from Asset Owners 

Below are answers to frequently asked questions about the mechanics and risks, mitigants, contractual arrangements and other business logistics with assets or balance sheets used to secure mid-market project capital via CAP funding.  These points apply only to individual projects with a sponsor bringing a leveraged, short-term “completion assurance” guarantee within CAP’s innovative structure.  The guarantee itself uses standard tools and rules, but does not follow traditions for the role of the guarantor, timeframe and obligations of the sponsor, nor the purpose of the guarantee itself. 

Instead of providing borrower credit enhancement, for example, there is no loan (thus the borrower’s creditworthiness is not a factor), and the guarantee’s operative period is limited to the construction and commissioning period, taking on none of the operational or managerial risk associated with Loan Guarantees. 

Instead, the guarantee serves to align incentives and focus the parties on completing the project assets no matter what the cause of a difficulty.  If the site becomes unusable, re. If you notice a question you happen to have that is not included here, please let us know.

Click on the question below to jump to the answer:

1. What is the risk exposure to the asset owner that pledges a Completion Assurance Guarantee (CAG)?
2. What does the CAG cover? What purpose does it serve? Why does In3’s funding partner need one? How do I obtain one?
3. Where does the money come from? Is it “guaranteed” as well? Funding terms & conditions?
4. How do invested/loaned funds get paid out?
5. How can the completion assurance guarantee be used?
6. What reassurance is there that the guarantee, once sent, will not be misused, called or cashed in?
7. Under what circumstances could the guarantee be called, drawn, or cashed?
8. What are the different options for pledging an asset as a CAG and how do they compare? Which one is best?
9. Why does CAP funding require a guarantee in the first place?
10. Why can’t you do lump sum drawdown?

Is there an alternative to the traditional CAG? Yes, short answer, 25%-35% cash deposit. more

Have a question that isn’t addressed here? Review how to qualify and review existing Questions about how In3 works, then if your question remains unanswered, ask us!

1. What is the risk exposure to the asset owner that pledges a Completion Assurance Guarantee (CAG)?

Answer: Project that receive CAP funding with a third party guarantor will be full insured against most critical-path hazards, while the Family Office accepts the bulk of risk during operations as an equity partner. Sponsors for the project’s guarantee earn “risk-adjusted returns” for the service of a Standby Letter of Credit or other form of enabling Security.

Short answer: Short answer: We securitize against any monetary loss. We won’t let that happen. If we did not provide this insulation from loss, there would be a moral hazard as the guarantor’s role and contract is limited to the asset pledge of collateral, and is not an active participant in the funding or completion of the sponsor project(s), thus any serious delays or project completion issues would have nothing to do with the guarantor’s actions or inaction. They must be exempt and held harmless in such situations as they are entirely beyond their control.

Scenarios that could occur, at least in theory, and what would be done to remedy each situation:

• • • • • • • No funding is delivered by the private Family Office investor:
              Solution:  If no funding has been delivered, the parties can unwind / cancel the transaction – the callable value of any instrument used in this structure is limited to the funds transferred against it, so although doing this would be irrational (after all the time and paperwork to contractually arrange it), the instrument or cash is fully revocable at the outset and can be returned/released.

If the project developer’s contractual breach occurs just after the project funding had begun to flow:

• • • • • • • Physical site unusable:  What if the uncured breach was caused by an insurmountable issue with the site? For example, if the initial construction permit was not available at the proposed site.
              Solution: either the parties would work together to obtain said permit or a new site would need to be identified so the project could be completed there.
            • No suitable site can be identified:  What if a new site and/or regulatory venue was not possible or feasible?
              Solution:  The project owners would be asked to change the project plan so that a solution could be realized without substantial delay.  Guarantor would receive additional compensation, or exercise other rights, per the terms of their sponsor agreement.

If the breach occurs after substantial project funding had begun to flow:

Note: In general, from this point forward, the parties would work together to finish the project … and a project will be finished, perhaps with alterations, or a modified scheduled and/or budget.

• • • • • • • Regulatory issue preventing project commissioning: What if the project funding resulted in substantial procurement and/or construction with a regulatory issue preventing commissioning?
              Solution:  the parties would need to work toward satisfactory resolution of the root cause with the Authority With Jurisdiction (AWJ).  If that could not be accomplished, a new site would be found and additional capital would be needed to make up for the losses.
            • Technology issue(s):  What if a technology issue or other aspects prevent project completion to begin operations?
              Solution:  the parties would work together to resolve the situation, using available insurance or other risk mitigants as necessary and available to resolve the issue(s).

If a breach occurs due to a delay or cost overruns after substantial funding had been drawn:

• • • • • • • Time has run out on the security period:  What if the time allocated to reach Commercial Operation Date (COD) was insufficient?
              Solution:  The Guaranty would be renewed for an additional period (with the guarantor compensated accordingly); if a cash deposit was used as Security, this cash would have been returned upon final draw of investment proceeds, whether or not the project had reached COD, so that would mean the investor would be without Security for as long as it took to achieve COD so that operational revenues could begin to flow.
            • Cost overrun:  What if funds ran short ahead of completion and commissioning? 
              Solution:  There are provisions in the Contribution Agreement with the project developer to cover this situation. The owner/developer would need to justify why the overrun occurred, and the likely solution would be providing the additional required funding.  The funder has as much at stake at this point as does the project owner, and monthly monitoring and reporting on draws would likely support or refute the need for additional funding, presumably taken from a Contingency reserve, to finish the project.
              Note:  the downside of allocating more capital is that the increased CapEx would proportionately decrease the project’s IRR due to lower return-on-capital relative to the total investment, as well as increasing the investment repayment period for any Preferred or Convertible shares.  However, the investment agreement is flexible enough to accommodate this situation if it were to occur  The original Security would not be touched.
            • Project non-completion:  What if the originally proposed project simply could not be completed?
              Solution:  the parties would work together to solve the roadblock, and failing that, would repurpose the Security for a different project.  The sponsor would receive step-in rights to exit or extend with additional compensation as per their contract.
            • Developer Fraud:  What if there’s fraud and the developer essentially skips town with the invested funds?
              Solution:  The guarantor would receive notice that they are entitled to exercise step-in rights, which can include (but not necessarily limited to) the opportunity to take an active role in the project, appoint or suggest new owners/board members, gain or increase equity carried interest, suggest or recommend an EPC or equipment vendor, etc.
            • Investor abandons the project:  What happens is the investor decides they’re not interested in the project?
              Solution: Within the contractual terms, duties and obligations, the offered Security will be applied to a different project, subject to the guarantor’s criteria, and compensation (if requested) approval.

1. 1. Contact us for sample contractual language to further assist with decision making once under an mutual non-disclosure and non-circumvention agreement.

2. What does the Completion Assurance guarantee cover? What purpose does it serve here? Why does In3’s funding partner need one?

Answer: In3’s innovative funding structure requires some form of Security for In3’s private Family Office to access its own resources per banking requirements.  IGF asset owners can hypothecate an asset used as a “completion assurance” guarantee (definition) for fully vetted and insured mid-market “impact” project financing.

Our family office partners tap their own pre-established lines of commercial credit, alongside cash holdings (making up for the gap between the value of the guarantee and the total amount of delivered funding for larger projects) typically as a minority equity investment.  CAP funding’s guarantee is only in place until the project is built and ready to begin commercial operations (SbLC is allowed to expire after reaching Commercial Operation Date, cash on the final drawdown of funds), thus the sponsoring guarantor takes on no credit risk, operational or management risk, technology performance risk, etc.

Most bankers and other professionals have an automatic association with what guarantees are for and how they “should” be used. The notion of hypothecation or traditional Loan Guarantees do not apply in this case.  Short-term guarantees align the parties on finishing and delivering the project, such that the team is held to account to work together in a cooperative manner until project completion, commissioning, and the start of commercial operations. SbLCs are issued with a specific expiration date, typically on an annual basis (365+1 days minimum) and renewable until COD, ensuring that the project gets delivered, that the assets are properly built and brought through commissioning to begin commercial operations. In the case of a delay, the asset owner would receive additional compensation or exercise other rights.

To be clear, the requested financial security is not …

1. 1. • Not a traditional Documentary LC (used for trade of commodities) that will be used or cashed to pay a seller, upon completion of a trade finance transaction. In our structure, it is mainly a Standby Letter of Credit (SbLC) held as security during the operative period (ahead of Commercial Operation Date, thus mainly during the drawdown and disbursement of funds to the target project for construction and commissioning) then released (allowed to expire), not cashed, to complete the transaction.  A cash deposit follows different guidelines.  See How cash security is held and contractually arranged.
      • Not a traditional Loan Guarantee, used as credit enhancement for a borrower, in the event of borrower default when taking a loan from mainly institutional lenders, which is widely done because of the Special Purpose Vehicle’s (SPV) limited or no recourse structure.  Instead, it is linked to an investment contract (contribution agreement) and used as security for the funder to access its resources during the vulnerable period while all the funds are being disbursed on a monthly schedule but no project revenue has yet begun to flow.  With lengthy cure periods for any violation of the investment agreement terms or covenants, it effectively filters out fraud. Only if the developer abandons the project, or steals the funding instead of building the project, is there such consequence for the developer that would result in them losing their own project.  As unlikely as that is, the funder temporarily holds 100% of the project’s equity in escrow and would find a solution to the developer’s default, probably by involving a new developer or managing the completion of the project ourselves. These remote circumstances can also be guarded against via securitizing the transaction for the guarantor, such as via a side agreement, offer of a lien against the project’s assets (in case the developer opts out before the guarantee is released), or other measures.
      • Nor is it an insurance product of any kind. No insurance product constitutes a financial guarantee, required by Capital Partners’ funding bank (for more on this, see Success Tip 5.2, “What about insurance as a completion assurance guarantee?”). However, most IGF-sponsored projects will have insurance policies such as for completion bonds or performance wraps, pricing floors, currency hedging, or insurance against other hazards like political risks, government interference, etc., which have their uses when facing certain hazards, thus sponsoring guarantors may ask developers to obtain such coverage for their own protection.
        Note that In3 can originate political risk insurance policies for our clients (more) and developers may wish to obtain such coverage or EPC / construction firm performance/payment/completion bonds, but when the developer sources their own Security, CAP funding does not require such insurance.

We realize there are often challenges (delays or unanticipated issues, setbacks, etc.) with almost any new construction project. Here the requested guarantee ensures that the challenges are addressed and resolved in a cooperative manner. It aligns all parties on the single-minded goal of bringing the project assets to begin commercial operations. It filters out fraud and other misconduct. Once this funding has been arranged, the guarantee is only a factor if there was uncured breach of contract, gross negligence, fraud, or other forms of “malfeasance”.

Using international demand guarantee rules (URDG 758), following the “cure period” (good faith, cooperative problem-solving) it is actually quite difficult for us to call the guarantee. In that sense, we are using it to protect everyone’s interests, discouraging anyone who would later prove to be fraudulent or criminally “unreliable”, to benefit those who are legitimate through more attractive funding terms, streamlined conditions and faster closings.

Which type of guarantee best fits your needs? More (In3 Finance comparison and steps to take)

To expand on the above points, see Question 5, below “How can the guarantee be used?” or Question 6, “What reassurance is there that the guarantee, once sent, will not be misused, called or cashed in?” Otherwise, get started.

3. Where does the money (our partner’s investment capital) come from? Is it “guaranteed” as well? Funding terms & conditions?

Answer: The financing comes from private, we say “in-house,” US-based single family offices. The name and location of this partner will be disclosed under NCNDA and/or once there is suitable proof of a qualifying project delivered to us. We appreciate the need for KYC (know your customer, or in this case, KY investor), which goes both ways. More on KYC and how we embed mutual safety checkpoints here.

We are the FO’s authorized agents worldwide, with the authority to provide indicative terms, screen, pre-qualify and provide vetting services (pre-due diligence) for incoming projects. References available upon request, but again, this goes both ways. It is customary to provide “bone fides” in increments as each party builds their mutual Know Your Customer (KYC) profiles toward a verifiable business transaction. All information exchanged is on a mutual “needs to know” basis.

Important to note that we do not ask for any commitments from the guarantor ahead of getting under contract for the funding. We help clients (whether via Affiliates or direct) prepare for due diligence via our Six Essentials (complete steps here) pre-qualification process. Due diligence is launched upon receipt of a guarantee with acceptable verbiage, draw schedule and a signed RWA letter, which takes 2-4 weeks, typically.

Is the funding “guaranteed”? Yes, once we reach financial closing, the funding is effectively locked down per a schedule of per-approved monthly drawdowns. These transfers are automatic (scheduled) by the funding bank for the full allocation of funding. A Loan Agreement will be negotiated and signed to govern the proscribed draw schedule and all obligations on behalf of both parties.

What are the funding terms & conditions? Indicative terms here. Basic conditions here. The only term that is typically negotiated is our equity carried interest (as reflected in a separate Share Purchase Agreement, issued/offered upon completion of due diligence), which is directly tied to the size and quality of the completion assurance guarantee.

4. How do invested/loaned funds get paid out?

Answer: They get transferred to the Special Purpose Vehicle’s bank account per the established draw schedule, then disbursed to the various vendors and other companies or individuals to cover procurement expenses or other costs as defined in the Uses of Funds statement.

In some cases, for certain projects, we may instead arrange to pay vendors directly. This is unusual and would be agreed to in advance.

To pre-approve the project’s funding plan, summarize the Total Project Costs (more) in a table with breakdown of major expenditure categories as well as a monthly proposed draw schedule, which strives to keep each month a consistent amount, but in practice, the draws are based on the cash requirements of the critical-path milestones of the project.

5. How can the completion assurance guarantee (BG/SbLC or AvPN) be used?

Answer: The receiving bank — usually the source of a funded project’s debt capital — keeps the BG/SbLC as security during construction, until the project completes commissioning and reaches Commercial Operation Date (COD), then the instrument is released upon “maturity” (technically, it is allowed to expire). The same mechanism applies to an Avalized Promissory Note (AvPN) issued by the project company or sponsor — the instrument remains in effect (“operative”) until COD, and then expires and falls away.

The terms and conditions for the use of the completion assurance guarantee are defined in a Loan Agreement that will prepared and signed, and available for inspection, before the BG/SbLC or AvPN hardcopy is sent. It would be unethical and improper to ask for the guarantee instrument ahead of mutually agreed-upon funding contracts. Only once all parties negotiate/agree and sign the funding agreement, which is what constitutes financial closing, would the guarantee be received by one of our partner’s banks in order to begin drawing down the project’s funds, with first draw within 45 days following financial closing.

6. What reassurance is there that the guarantee, once sent, will not be misused, called or cashed in?

Answer: First, these instruments are transferable, as required by the Uniform Rules for Demand Guarantees (ICC publication 758), so that it can be sent from the issuing bank to the investor/lender’s bank. The BG/SbLC or AvPN would not be transferred away to anyone else because then In3’s partners would no longer have it. Simple.

A bit more complex is what could cause the instrument to be called? Short answer: the instrument is callable (and if it was not callable, it would not constitute a proper financial guarantee), but it would only be called in the event of uncured breach of contract. If the Developer upholds the covenants, terms and conditions (T’s & C’s) of the Loan Agreement, there will be no issue. The overarching purpose is to provide security that assures or ensures completion of the project’s assets. You will be invited to review and consent to a full disclosure of all these T’s & C’s before anyone is asked to issue the actual guarantee instrument.

In practice, problems that arise during the draw period are always worked out in a cooperative manner so that the BG/SbLC remains in force (an “operative instrument,”) and so that nobody calls the guarantee, or calls off the project(s). To do so, after all the arrangements have been made, would be paramount to a disaster, where — by contrast, the true intent of all this — the upside benefit of completing and operating the project, organized to generate long-term cashflows and often social/environment value, is incomparable.

To call a completion assurance guarantee would be an absolute last resort, and would be reserved for situations where there is no solution (no “fix” or cure available) to deal with fraud, malfeasance, or other “incurable” non-compliance with the T’s & C’s of the project developer/owner’s funding agreement. Basically, if they ran off with the money and left no forwarding address. In practice, this cannot happen because the monthly draws are monitored, so at most a single month’s funding could be at issue, where even that has not happened even once in all our history. Working together in an open and cooperative manner ensures that new project construction and commissioning will stay on track to reach Commercial Operation Date (COD).

Note that for any “third party” guarantors arranged by In3, the guarantor is in a securitized position with step-in rights in the extremely unlikely event that the developer opts out and abandons their own project and its assets. The guarantor would, in that case, be entitled to increase their compensation in the restructuring ownership due to developer default.

In a way, with this approach to funding projects, the objective becomes making sure the Developer and, in turn, the contractors or subcontractors, do not their breach their respective agreements. It is an incentive to work together to resolve whatever issues crop up. Note that it is also common for the EPC/general contractor to carry insurance in the form of a performance/completion bonds, another layer of protection for the developer, even though the capital (funding bank) cannot accept insurance in lieu of a financial guarantee.

Preview: Question 7 translates all this into practice, then explains what constitutes an uncured breach that could result in a claim against the guarantee.

7. Under what circumstances could the guarantee be called, drawn or cashed?

Answer: Uncured breach of contract (loan agreement) by the developer. The proposed loan agreement will be put on the table following our due diligence, which will spell this out in the proper context. WE DO NOT EXPECT A COMMITMENT FROM ANY GUARANTOR UNTIL THIS CONTRACT HAS BEEN PROPERLY REVIEWED AND ENTERED.

It is important to understand the business context and rationale for why we would never call an issued BG/SbLC or AvPN, and never have. In fact, calling/cashing/drawing on an issued instrument must be avoided. We can’t call it except when there is an iron-clad case of fraud, as the courts would need to decide, as they have been quite consistent over the long history of these rules, URDG ICC 758. Making any claim would be a strong negative reflection on all parties, including In3. In practice, we would not call it, as we simply would not need to; the parties must work together to complete the project (or a similar project, or at a different site …) no matter what.

Our funding partner becomes the developer of record and a shareholder in the project, so the last thing they want would be (a) to disrupt the success of the project by not releasing a guarantee, or (b) to jeopardize banking relationships based on a 40-year track record of doing projects in this way just because one project needs a little more time or money to get on its feet.

What constitutes an “incurable” breach? Essentially, it comes down to four areas, namely

(1) Gross Default (the developer closes shop, leaves town, leaves no forwarding address …),

(2) Gross misrepresentation and fraud (the warranty section of the Loan Agreement defines this in greater detail),

(3) Misuse or misappropriation of funds, where the documented Uses of Proceeds defines the correct and proper allocations, or

(4) If the instrument expires (bank guarantees or AvPNs are issued with an expiration or maturity date) before the project assets are completed and commissioned. This last one is easily fixed/prevented: renew the BG/SbLC or AvPN as needed until COD.

To be clear, the BG/SbLC, SG or AvPN must not be called – that’s an outcome we must make sure we all avoid, as (worth emphasis) it would reflect negatively on all of us, including the Family Office, In3, and the developer/sponsor(s) in the eyes of our respective banks. In other words, breach of contract by the developer is a worst case scenario that applies only if the project loan agreement’s T’s & C’s are violated, following a substantial cure period, which is akin to a complete breakdown of good will and cooperation, where we would have no choice but to call the instrument (fraud/theft) to make up for a material loss, effectively putting the case into the court system. The burden of proof would be on the family office to show there was uncured material breach. The Uniform Rules for Demand Guarantees (URDG ICC 758) are well-proven as reported by independent legal counsel Reed Smith; see URDG 758 – A facelift for the Demand Guarantee Rules.

The point is that the guarantee will not be called arbitrarily or at all — that would be both illegal and a waste of time. In fact, it is quite difficult to prove incurable breach of contract such that a legitimate claim could be made under URDG 758. Thus, such completion assurance guarantees serve as surety that the parties will work through any issues. More on these “demand guarantee” technicalities.

Lastly, note an important subtlety: a BG/SbLC or AvPN could only be called/cashed/drawn up to the extent of funds transferred at that point. If the instrument has just been issued, for example, but no loan/investment funds have yet to be transferred against it, the instrument effectively has no monetary value at that point, and thus it makes no sense for it to be called. There is, in effect, no demand guarantee operating until funds are transferred against it. And if no funds are transferred, and the entire funding arrangement were to be canceled, the BG/SbLC or Promissory Note can be taken back or “unwound” without material consequence.

We cannot imagine a reason why anyone would want to do this, having come all that way, ignoring the upside business value of completing an operating project, but we have found this explanation is sometimes key to understanding the fundamental tenants of the proposed business arrangement.

Does this logic help you appreciated how this model is actually quite low-risk and safe for all parties? See also, Why CAP [formerly CGP] and How It Works “explainer video” if you wish to have a visual depiction. We are striving to show how everyone who uses this approach with basic honesty, and non-fraudulent intentions, will be protected. We know from experience that this model is reasonably low risk, and our track record shows it does work out well for all parties.

8. What are the different options for pledging an asset as a Completion Assurance Guarantee (CAG) and how do they compare? Which one is best?

Answer: Depending on available assets, usually the right answer is an asset-backed Standby Letter of Credit or SbLC, shown at the center of the comparison chart below.

With sufficient creditworthiness, our bank may accept your balance sheet without the need for a specific asset pledged as collateral.  But in addition to arranging for our bank’s guarantee using an SbLC sent via customary Brussels SWIFT, we can also accept, on behalf of client projects the guarantor would want to support, either hypothecated securities (public equities, MTNs, ISIN-registered and rated bonds, or gold with SKR) or in some cases available assets or credit can be converted to cash as a short-term deposit as doing so is significantly more leveraged than the other two approaches.

Comparison of the available pathways below:

9. Why does CAP funding require a guarantee in the first place?

Answer: In3’s family office funding partner has long-established relationships with banks where we have built up lines of commercial credit — sometimes called a “credit facility” — that will be leveraged, alongside cash holdings as equity carried interest. The amount of equity depends on several factors, but mainly relies on the value of the Completion Assurance Guarantee (CAG) relative to the total funding request, and project profitability (measured as unlevered IRR), which varies by industry.

The funder established these credit facilities to build their own large-scale projects, so to make this capital available to In3 client projects, the bank relationship managers expect us to offset at least some of the risk of non-completion using a CAG or cash deposit. In other words, the funder is the developer of record in the eyes of their bank.

10. Why can’t you do lump sum payments?

Answer: Structurally, per FAQ #9, above, because funds are delivered in monthly drawdowns, any initial payments in excess of most or all of that month’s allocation would deprive the project of the necessary cash to make initial procurement deposits or other costs to secure the site and build the project on time and within budget.  When funding In3 client’s construction projects, a monthly drawdown schedule further assures the client’s SPV bank managers that funds will be allocated and used per the terms of the funding agreement(s), offering an additional layer of protection against fraud. Monthly draws accommodate critical-path construction milestones and cashflow requirements using consistent (the same amount each month) or increasing monthly amounts as construction activities ramp up. Together, this structure effectively filters out non-completion risk.

Cash deposit alternative to CAGs: know more and compare to a CAG

Still have questions? We’ve got more answers, no doubt. All FAQs

Further “how to” tips and advice:

* How to obtain a suitable Completion Assurance Guarantee (CAG)?

* How to obtain a CAG sponsor (stepwise instruction)

* What about insurance products like performance/completion bonds? (Short answer: insurance products do not constitute a financial guarantee.)

Browse In3’s “Handy Resources” for tools, templates and guides, then our Proposal Builder “kit”, which includes all the various MS Word templates for the qualifying completion assurance guarantees, bank letters and a pre-qualification worksheet to get started. Or contact us if still necessary.

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