How Texas solar sponsors can secure SBLCs without posting 100% cash collateral

Posted at 02:16h in Technology and Science by

If you are developing solar in Texas, you run into Standby Letters of Credit fast. Interconnection milestones. EPC performance support. Landowner decommissioning obligations. Sometimes a PPA or tolling counterparty wants credit support too.

Then the bank hits you with the default offer: “Sure, we can issue the SBLC. Post 100% cash collateral.”

That outcome is common, but it is not inevitable. The trick is understanding why the issuer asks for full cash, and what alternatives actually pass underwriting.

This article breaks down the bank logic, the Texas-specific pressure points, and the practical ways sponsors structure SBLC issuance without parking every dollar in a blocked account.

For reference, visit Financely’s SBLC service page.

Where SBLCs Show Up In Texas Solar

1) Land leases and decommissioning financial assurance

Texas requires solar power facility agreements to include financial assurance for removal and restoration. Acceptable forms include an investment-grade parent guaranty, a letter of credit, a bond, or another form acceptable to the landowner. The statute also sets timing requirements and restricts cancellation without replacement.

2) Transmission-level interconnection deposits and security

In ERCOT, the interconnection process often requires deposits or security to keep your place in the process and cover certain costs. Texas rules allow Transmission Service Providers (TSPs) to require a reasonable deposit or other security tied to planning, licensing, and construction of new facilities, and addresses what happens if the interconnection is not completed.

3) EPC and construction obligations

EPC contracts frequently require contractor security (or owner security depending on the contract), and SBLCs are a standard instrument for performance and payment support in large infrastructure builds.

Why Banks Ask For 100% Cash Collateral

Banks issue SBLCs as a credit exposure. If the beneficiary draws, the bank pays, and then the bank collects from you under the reimbursement agreement. If the bank doubts your ability to reimburse immediately, it protects itself with full cash collateral.

Most “100% cash collateral” SBLC requests happen when the applicant looks like one of these:

  • Early-stage SPV with limited balance sheet
  • Sponsor with thin liquidity or inconsistent financial statements
  • No committed project finance yet, no contracted cash flows, or unclear timeline
  • Weak controls around the specific SBLC purpose (who can draw, when, and on what documents)
  • High uncertainty around the underlying obligation (for example interconnection cost risk or change orders)

So the bank chooses the cleanest outcome: cash.

Your job is to give the issuer a better risk story that still survives credit committee scrutiny.

The Real Options To Avoid 100% Cash Collateral

Option A: Sponsor-level SBLC facility (credit-based issuance)

This is the cleanest path for serious sponsors.

Instead of issuing an SBLC to a thin SPV, the issuer underwrites the sponsor (or a strong parent), sets a committed or semi-committed LC line, and prices it like a corporate credit product.

What changes:

  • You may post partial collateral (a margin) rather than 100% cash
  • The bank relies on sponsor liquidity, leverage, and cash flow coverage
  • You can issue multiple SBLCs across a portfolio under one facility

What the bank will want:

  • Two to three years financials, current management accounts, and liquidity proof
  • Debt schedule, contingent liabilities, and existing LC usage
  • Corporate structure chart and ownership
  • A clear schedule of SBLC beneficiaries, amounts, expiry, and draw conditions

This is how bigger developers avoid the “cash only” trap. They do not ask for a one-off SBLC. They build an LC platform.

Option B: Pledge liquid securities instead of cash

If you have liquidity but hate immobilizing cash, you can often collateralize with high-quality marketable securities rather than raw cash.

Common forms:

  • U.S. Treasuries or treasury money market holdings
  • High-grade bonds (depending on issuer policy)
  • A pledged securities account with bank control

Why this helps:

  • The bank can haircut the collateral based on risk
  • Your cash stays deployable while the collateral sits in a controlled form
  • The “economic pain” feels smaller than wiring 100% cash

Reality check: haircuts and eligibility vary by bank. Some banks still insist on cash for certain profiles. The stronger your credit, the more flexible this becomes.

Option C: Wrap the SBLC inside project finance or construction debt

If you are heading toward construction debt, you can sometimes structure the SBLC as a sublimit inside the broader financing package.

Typical pattern:

  • Construction lender underwrites the project and security package
  • SBLC is issued for a defined use (interconnection security, PPA support, or EPC-related)
  • Collateral support comes from the project finance security package and sponsor support, not just cash

This tends to work once you have:

  • Executed EPC with a real contractor
  • Interconnection pathway and milestone clarity
  • Permitting status and site control
  • Equity plan and credible funding schedule

It is not a pre-development solution for everyone, but it is a strong “late-stage development to NTP” tool.

Option D: Use a bond where the contract allows it, and reserve SBLC capacity for the hard requirements

In Texas solar leases, financial assurance can be satisfied by a bond or an investment-grade parent guaranty, not just an SBLC, depending on what the landowner will accept.

If your land lease can be handled with a bond, you reduce SBLC demand and save your LC capacity for the obligations that truly require bank paper.

This is a practical move: do not overuse SBLCs when a cheaper instrument satisfies the requirement.

Option E: Tighten the SBLC draw terms so the issuer views it as lower risk

Banks hate SBLCs with vague draw mechanics.

You want:

  • Clear beneficiary and purpose
  • Objective draw triggers tied to defined non-performance
  • Clean documentary conditions (no “open ended” disputes)
  • Defined expiry, renewal mechanics, and replacement procedures

A well-structured SBLC reduces the “unknown draw risk,” which can improve pricing and collateral terms.

If you need a reference point for how “at sight demand” language and ISP98-style SBLC formats are commonly structured, ERCOT publishes sample SBLC language used in its context, including demand mechanics and governing rules.

Texas-Specific Timing Risk: Interconnection Security Is Not Static

A lot of developers underestimate how interconnection cost responsibility and security timing can shift based on when agreements are executed and which milestone you are at.

Recent commentary on ERCOT SGIA-related changes highlights that timing and cost planning matter more for projects executing SGIAs after December 31, 2025, and points to changing treatment of cost responsibility and security. Treat this as a signal: your SBLC strategy needs to match your interconnection timeline, not just your financing wish list.

Translation: the earlier you plan SBLC capacity into the interconnection plan, the fewer ugly surprises you get.

What Sponsors Should Prepare Before Approaching Issuers

If you want less than 100% collateral, you need to walk in with a lender-ready file. At minimum:

Sponsor credit package

  • Financial statements and current liquidity proof
  • Debt schedule and contingent obligations
  • Organizational chart and KYC

Project package

  • Site control and lease summary, including decommissioning financial assurance requirements
  • Interconnection status and required security milestones
  • EPC term sheet or executed EPC (if available)
  • Revenue plan (PPA, merchant strategy, hedge concept)
  • Project budget, uses and sources, and schedule to COD

SBLC schedule

  • Beneficiary, amount, tenor, auto-extension needs
  • Draw conditions, documentary requirements, governing rules (ISP98 is common)
  • Replacement mechanics if project financing closes and SBLC is rolled

The bank is underwriting your ability to reimburse on day one of a draw. Treat the package that way.

Common Mistakes That Trigger Full Cash Collateral

  • Asking for an SBLC before you can explain the exact draw mechanics
  • Treating the SPV as the borrower with no sponsor support
  • No clarity on interconnection milestones or security requirements
  • Weak financial reporting or missing documentation
  • Mixing requirements (lease decommissioning vs EPC vs interconnection) without matching instruments to each obligation

Where Financely Can Help

Financely supports sponsors and developers by packaging SBLC requests into lender-ready submissions and structuring the issuance path around real underwriting constraints, including alternatives to 100% cash collateral where credit and structure allow it.

If you want to explore issuance pathways and what terms are realistic for your profile contact us.

Final reality check

There is no magic “non-collateral SBLC.” Banks do not issue unsecured paper to weak credits because it is a bad trade for them.

What does work is upgrading the credit story (sponsor-level underwriting), tightening controls (clean draw terms), and using the right instrument for each obligation (bond vs SBLC vs parent guaranty). Do that, and the “100% cash” requirement often stops being the default.