IGF Guarantee Safety and Security

Non-traditional use of assets as short-term security leverages private capital to generate liquidity

Asset owners often ask us “is this safe?” In practice, there is no reason to call any guarantee (used as completion assurance, the only way we ever use them, hence the name “Completion Assurance Program” or CAP funding), even in extreme cases of developer fraud. We are using an innovative structure, proven over several decades to solve multiple issues and thus deliver advantages for all stakeholders.

This structure is perhaps closest to the practice of “hypothecation,” with certain characteristics in common with “credit enhancement,” and even insurance (such as completion bonding or surety), but with important differences, starting with much shorter timeframes and the fact that there is no loan or credit involved.

This is also dissimilar to insurance because it is a financial instrument, involving banks and customary methods like Brussels SWIFT or a custodial account, and thus not an insurance product at all.

What does “hypothecate” usually mean? How does that compare to “credit enhancement”?

Hypothecation is usually about pledging specific assets as security for a loan — a structure where an asset is used for a period of time without giving up title, possession, or ownership rights, such as the income already generated by the asset.

Credit enhancement is a broader concept that includes various techniques (including collateralization, such as via a lien, or a loan guarantee) to improve creditworthiness. But in the IGF structure, the asset’s hypothecation generates additional liquidity for its owner, used shorter-term, limited to the period ahead of construction completion, just prior to the start of project operations, and thus sharply different from a mortgage, lien, or assignment (ref) of an asset. Note that some guarantors will have sufficient financial depth that no specific collateral will be needed.

Further, with IGF and In3 Capital (CAP) funding, there is no lender, nor would our funder (via a Joint Venture equity partnership) or our bank need to seize the asset if the terms of the agreement are not met.  Such “uncured” default (breach of contract) would be solved some other way. This is part of an innovative structure where the fundamental mechanisms deserve full understanding.

The vast majority of the time, the guarantee backed by the asset(s) will have been released by the time the project is operational. All stakeholders are incentivized to work together to finish the project’s construction and commissioning to begin commercial operations, at which time the guarantee is allowed to expire on its maturity date.

Why would we or the bank not seize the underlying assets if the project developer failed or faltered in their role as developer? Because, history shows, we would solve any breach of the funding contract another way. Even in the unlikely event that project developer breach did occur, following a lengthy cure period, the developer would have effectively opted out of their ownership rights, leaving room for a different party to finish and/or co-own the project(s).

If the project could not be completed, for some reason, after all avenues had proven dead ends, the guarantee would be assigned to a different project — one that could be finished.

Although the legal right to “call” the guarantee must exist (otherwise it does not offer the required security), there are no situations where the guarantee would need to be called. Any third-party guarantor that did not cause the developer’s default (presuming the asset owner did not interfere with reaching Commercial Operation Date) must be held harmless in any case, thus step-in rights would make them whole.

In any worst-case scenarios, such as a developer who gives up on their project, “opting out” would mean that the project developer deliberately abandoned their own project, and being unavailable or disinterested (or both), could be replaced through equity ownership restructuring. If the contract was breached before funding began to flow, the transaction would simply be unwound, and the underlying guarantee returned or released.  We cannot think of any reason why anyone would do that, having come that far, with signed and notarized funding contracts in place, but this discussion is about safety to the guarantor, legal rights and obligations, not business logic.

If funding had been disbursed, at least in part, then the guarantor would be invited to exercise step-in rights, and the new team would finish the project or reassign the pledged asset to a project that could be finished. Thanks to a closely monitored monthly draw schedule, typically only one or two months of draws would be at risk, an exposure that would not affect the guarantor.

All of the above is worst case scenario, extremely pessimistic and extremely unlikely to occur.  These disclosures are part of IGF’s policy of being up-front and transparent about how things would unfold if such unforeseen downsides did occur. We do our absolute best to filter out any fraud and have had no issues with fraudulent developers or parties that refuse to meet their contractual obligations.

Because of that, we have never had to call any guarantee in all of In3 Capital Partner’s operating history, plus we happen to have a strong counterincentive — the parties would end up in court, which would cause irreparable harm to our banking relationships, thus in practice there are always alternative solutions making it entirely unnecessary to call or cash any instrument.

Are there any other options besides this “Completion Assurance” Guarantee and a hypothecated instrument or direct transfer of an asset? Yes, a more leveraged Cash Deposit (compare), returned upon project deliver, still just as short-term Security, not used as a down payment or as owner equity contribution to the project’s funding.