To find solutions where the contractor or principal is having difficulty in obtaining surety bonds and
demonstrates one or more of the following attributes:
Is a newcomer to the surety arena by virtue of being a small and emerging contractor with
limited financial resources and/or experience with bonding.
Is a more established contractor that has gone through financial difficulty or
upheaval resulting in the need for more creative tools to secure bonding.
Is an established or even larger contractor that has a more nontraditional business
model, financial presentation, or composition of assets than typically required in the
standard surety marketplace.
We have a track record of assisting contractors in restructuring, building and sometimes
rebuilding their businesses in the public works and commercial contracting environment
where bonds are needed.
Specialty risk mitigation involves any or all of the following:
This can include real estate, cash or equivalents, cash value of life insurance (CVLI),
and irrevocable letters of credit (ILOC).
Each form of collateral presents some challenges and limitations:
Real estate equity:
In most cases our interest rests in taking a first trust deed
position on unencumbered property.
In rare cases we can consider taking a second trust deed or third trust deed position.
In the current credit environment, real estate is discounted heavily to recognize the
illiquid nature of the collateral, possible sale and/or foreclosure costs, and the
market fluctuations that can be violatile at times.
In most cases, real estate collateral will be accompanied by the use of Funds
Administration or other risk mitigation tools.
Cash or equivalents:
Though widely taken in specialty situations as stand-alone collateral, removing
cash from a contractor’s operation can also increase the stress on the business
and impairs liquidity.
We evaluate the possible impacts to operating cash flow when underwriting with
the use of liquid collateral and it is often taken in conjunction with the use
of Funds Administration.
This involves running the construction proceeds through an escrow account in the
contractor’s name and with their full consent but managed by the funds
administrator on behalf of the surety.
All payments to vendors, subcontractors, etc. are paid through the job specific
escrow account but with input and validation of progress payables by the
As a practical matter, this process can give good insights into the
contractor’s back room in terms of internal controls, job costing and accounting
procedures and can serve to protect the surety from payment bond
The involvement by funds administration staff can also serve to provide a valuable
source of objective input and feedback to assist the contractor in optimizing these
back office functions.
Although widely used as a stand-alone mitigation tool in the specialty segment,
it does not protect the surety in situations of under-bidding or other performance
In some cases, the surety may also require that the escrow account be “pre-loaded”
with additional funds that may be used as project specific working capital funds
to support job cash flow needs.
Bond Guarantee Programs (various):
The SBA and a number of regional guarantee programs can be used to support specialty
We currently participate in the SBA’s Preferred Surety Bond (PSB) program that provides
either an 80 or 90% guarantee depending upon the type and status of contractor.
Some regional programs will give up to 40% in ILOC collateral to be used in conjunction
with Funds Administration.
Historically, specialty risk comes from three directions:
These are contractors/principals who rarely need surety credit.
Often the accounting and financial presentation is outside the surety norm but there
is clearly financial substance and experience.
In a number of cases the contractor does not appeal to mainstream surety markets due
to the lack of a predictable bond premium flow to the surety.
Small and Emerging:
These contractors may be new in business, or migrating from private/commercial work
to public works.
This segment includes 8A, MBE, WBE or DVBE deal structures, often supported by
mentoring or other arrangements that are clearly non-standard.
Related to these are the bond guarantee programs, including the SBA, which are working
in this arena.
Challenged or Distressed:
These are contractors who have fallen out of standard markets and cannot
qualify for surety credit without the use of specialty tools such as collateral,
funds administration or bond guaranty programs.
If the ‘red flags’ do not portend bankruptcy in the near term and the contractor and
its principals continue to have adequate financial resources and experience, such
accounts can often be written in a specialty manner.
Highly Complex, Untraditional or Non-Sticks and Bricks:
These contractors may not demonstrate any of the above attributes but are in one of
the other following categories:
Non-traditional class of business that few sureties have interest in.
Have a highly complex financial composition and presentation such that mainstream
sureties have little interest.
May have substantial resources outside the bonded entity combined with a
distaste or inability to allow the construction business to be fully capitalized
for the desired bond program needed.
One example here may be the general contractor wanting to minimize equity growth
to reduce potential legal exposure but can provide the necessary indemnity and
financial resources with specialty tools to support their bond needs.
Specialty Underwriting, generally speaking:
It is difficult to summarize the specialty underwriting process.
With transactional and emerging contractor business, there are often issues with
the quality of financial information available.
The type of financial analysis expected in standard markets is often not plausible.
The underwriting decision will be largely predicated upon evidence of proper experience,
reasonably good credit and apparent short-term liquidity buttressed by one or all of the
mitigation tools set out above.
Some of these contractors can be coached to improve their financial presentation.
The goal of Vista Surety is to work in partnership with the contractor and representing
agent in hopes of optimizing the contractor’s opportunities for growth, success, and
possibly an eventual transition to the more standard markets.
With challenged and distressed contractors, there can be many types of issues
(e.g. prior year losses, a former bankruptcy, a prior surety claims situation,
non-renewal of bank lines, tax liens, etc.).
These all present different issues for the surety.
Some are un-writeable under any scenario.
To a great extent this underwriting process is forensic.
Can the contractor be returned to financial health with specialty support and are the
rest of the fundamental underwriting pieces in place?
While exhaustive discussion is beyond the scope of this article, some general
observations on other differences between ‘standard’ and ‘specialty’ follow:
Often includes in-house or CPA compiled financials of mediocre to poor
The underwriting then often involves additional verification of assets on the
business and personal statements and review of corporate and personal tax
In many cases, because the deal has already been shopped around and declined
in standard markets, often the ‘opportunity’ will arrive at the specialty
underwriting desk with little time for additional research and
Deals are decided upon in this environment with extra emphasis
on ‘follow-up’ items in addition to application of the risk mitigation tools
Best practice is to make the agent/contractor aware that the deal structure may
have to change if new information emerges after the fact; for example, if the
real estate equity is discovered not to be as advertised, etc.
Specialty surety is best viewed as transactional business, even when a ‘program’
As such, it is often not possible to function with ‘bond lines,’ etc.
This is particularly true with challenged or distressed contractors where each
deal has to be viewed in light of the short-term financial picture, the bonded
aggregates on hand, and the effectiveness of current risk mitigation tools that
can be applied. Often the contractor is trying to re-structure to re-enter
standard markets (or simply survive near-term) and the surety has to
be integrally involved in that process.