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Is a New Bonding Product On the Way?

12/10/2013 | Construction Blog

Recent news in the surety industry suggests that demand is increasing for a different approach to bonding on projects using public-private partnerships. A significant push seems to be underway in the surety market to provide a product responsive to that demand.

Lenders and other players in the P3 market have suggested that allowing lenders or developers to make claims for more immediate cash flow rather than relying on traditional bond claim handling is necessary to make the projects work better. Risk management firms are in the process of developing new payment and performance bond forms that might accomplish this end. The anticipated blend would still include provisions which set the guarantee out as it has been done in the past and leave the surety in control of most of the completion work though. The new component would be more immediate access to cash in the event of default.

Some risk management and surety firms are already providing bonds based on alternative security arrangements and with higher limits, but this does not seem to be responsive to the market’s needs. Leaders in P-3 development seem to suggest that more liquidity is necessary to keep P-3 projects moving forward. This would help with efficiency and avoid delays in completion dates. Those same professionals say the time and cost associated with a traditional bond approach is becoming increasingly unworkable.

Two large questions remain unanswered: (1) whether there is any real difference between P-3 projects and other projects in terms of the desire of lenders and owners for liquidity (don’t all lenders and owners want faster liquidity in the bond setting?); and (2) how the new bonds will actually differ when they are done.

It is unclear when more clarity will be offered on this potential new product. One thing is for sure though: lenders, developers, and owners are eager for it to come sooner rather than later.