Using Surety Bonds To Deleverage Balance Sheets

May 21, 2019

Renewable energy companies are relying on this innovative alternative to meet financial assurance requirements.

Renewable energy companies, whether serving as an asset manager or developer (or both), often find financial assurance requirements in contractual agreements with utilities, public entities, and corporate off-takers.

Using a surety bond instead of a letter of credit or cash to meet contract requirements has many advantages, and over the last few years acceptance of surety bonds to meet financial assurance requirements such as power purchase agreements (PPA), interconnection, and decommissioning obligations has broadened.

When counterparties do not have experience with surety guarantees (or associate them only with construction contracts), there may be misconceptions resulting from the historical inability of surety companies to meet long-term obligations and pay on-demand obligations.

Recently, surety companies have proven to be amenable to changes in the bond form to meet these new types of obligations thereby giving renewable energy companies an alternative to using letters of credit or cash. In most cases, surety bonds will be less expensive than the letter of credit option and will always be deemed a contingent liability rather than debt.

The selected method to comply with these financial assurances can have a significant impact on the balance sheet of renewable energy companies.  As such the following factors should be part of the decision-making process:

 

(1) Whether the letter of credit will be deemed as debt or a contingent liability (2) The fees associated with each option (if using cash, what is the internal rate of return or cost of capital) (3) Whether the letter of credit will require a security interest in overall or project assets (4) Whether the rates for the letter of credit fluctuate (5) Surety bond cost and acceptance of use by counterparty

 

Whenever a standby letter of credit has been provided by the bank, you may have the opportunity to instead use a surety bond.

ADVANTAGES OF USING SURETY BONDS

Credit availability: Where a letter of credit ties up the company’s credit capacity, surety bonds are not credited against a company’s bank line.

Rates: Letters of credit rates fluctuate based on a variety of factors and often incur fees. Surety rates are based on the company’s credit strength and do not fluctuate based on market conditions. Surety fees have no additional fees outside of the direct cost of the bond.

Security/collateral: Where letters of credit from a bank require a UCC filing, which acts like a lien to protect the bank’s financial interest, surety bonds require only a general agreement of indemnity.

Covenants: Banks may have restrictive covenants as part of the bank line of credit or letter of credit program. Surety agreements do not encompass covenants.

TYPES OF OBLIGATIONS

 

(1) Power Purchase Agreements These agreements typically have a security requirement tied to power production. Surety bonds can be used as a new form of assurance with many counterparties throughout the country. (2) Interconnection Agreements Energy companies typically require a financial guarantee to ensure that a developer will perform maintenance and corrective work for the duration of the interconnection. (3) Decommissioning Many towns, counties, and public sector organizations require a form of financial assurance to address cost to remove installed power generation equipment at the end of lifetime to return the site to pre-construction condition. (4)Procurement Purchase orders for modules, inverters, and other materials usually require not only a deposit, but also additional security to cover a portion of the full purchase order cost while in transit. Both domestic and overseas suppliers can accept bonds for purchase order obligations.

Download Using Surety Bonds to Deleverage Balance Sheets here.


As National Surety Manager for Beecher Carlson, Karl Choltus oversees all surety operations within Beecher Carlson. He  has more than 25 years of experience as a surety manager and surety underwriter. He can be reached via email at kcholtus@beechercarlson.com.


This article is intended for informational purposes only. It is not a guarantee of coverage and should not be used as a substitute for an individualized assessment of one’s need for insurance or alternative risk services, nor should it be relied upon as legal advice, which should only be rendered by a competent attorney familiar with the facts and circumstances of a particular matter. Copyright Beecher Carlson Insurance Services, LLC. All Rights Reserved.