This is a real case that was handled by our surety bond experts… a doozie! See what you can make of it.
- This is a Performance Bond request for a multi-million dollar subcontract
- The applicant / principal is a long established company
- They have successfully completed similar sized projects
- The company has a modest net worth, but is on a profitable trend. Ratios are OK.
- Personal financial statements of the stockholders add more net worth to the picture
- The company is owned by a father and son. Son is the primary stockholder.
- We noted their SS numbers are only a few digits apart
- Father has a substantial net worth. Son has a small net worth as indicated on his personal statement.
- The applicant has started the subcontract
- The GC / obligee has a mandatory bond form – very tough. It effectively makes it a forfeiture bond (obligee completes the job and sends you the bill.)
- Father has a living trust
- Son also indicated he has a trust
A lot of moving parts. What are the issues?
- Low company net worth. Too low for the size bond requested.
- “Close” SS numbers imply these individuals are immigrants (received SS numbers at about the same time). Are they U.S. citizens?
- Started subcontract. Why were they allowed to start without a bond? Degree of completion? Work acceptable? Bills paid? On schedule?
- Do we want to write a forfeiture bond form (financial guarantee?)
- What assets are in the trusts? Can they give indemnity? Will we rely on the indemnity of a trust?
– Think of your possible solutions –
Here is the approach crafted by our underwriters:
- Low company net worth. We do not prefer to require collateral because it may be counter-productive, making it harder for the client to complete the project. Instead, the client agreed to add capital to the company – an investment in their future. The funds could be a subordinated stockholder loan, or a stronger method: Additional Paid-in Capital. The latter is more permanent and therefore desirable. The client agreed to permanent capital that would be verified in writing by their CPA and supported by a current interim balance sheet.
- Close SS numbers. Why would we inquire about anyone with a social security number? It is because the number itself does not prove citizenship – nor does the filing of a US tax return. Non-citizens authorized to work in the U.S. can get a SS#. “Tax residents” are permanent residents and green card holders who are non-citizens required to pay U.S. taxes. All sureties are cautious when taking the personal indemnity of a non-citizen. They may easily flee the country to avoid their obligations. On this account we determined the father and son were immigrants as we suspected, and naturalized U.S. citizens.
- Started subcontract. This would be clarified by obtaining our All’s Right Letter from the obligee, stating the relevant facts on the project (degree of completion, on time, no problems, etc.)
- Bad bond form. We had previous dealings with this major GC and negotiated a bond modification that made the bond operate more normally. They agreed to use the bond mod again.
- Trusts. It turned out there was only one trust. The son was the beneficiary of the fathers trust, no separate trust of his own. A review of the father’s trust showed it was not prohibited from signing the indemnity agreement. However, living trusts are revocable, meaning the terms can be changed and assets moved out – making them unreliable indemnitors. And it contained the single most important asset, the father’s residence. How to overcome this last obstacle? Our solution: We will place a lien on the property giving us access regardless of changes in the trust.