Rancho Mesa's Alyssa Burley and Director of Surety Matt Gaynor discuss performance bonds for private equity contractors.

Show Notes: ⁠⁠⁠Subscribe to Rancho Mesa's Newsletter⁠⁠⁠.

Producer/Director/Host: ⁠⁠⁠Alyssa Burley⁠⁠⁠

Guest: ⁠⁠⁠Matt Gaynor⁠⁠⁠

Editor: ⁠⁠⁠Megan Lockhart⁠⁠⁠

Music: "Home" by JHS Pedals, “News Room News” by Spence

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Transcript

Alyssa Burley: Hi, this is Alyssa Burley with Rancho Mesa's Media Communications and Client Services Department. Thank you for listening to today's top Rancho Mesa news brought to you by our Safety and Risk Management Network, StudioOne. Welcome back everyone. My guest is Matt Gaynor, Director of Surety with Rancho Mesa. Today we're going to talk about performance bonds for private equity contractors. Matt, welcome to the show.

Matt Gaynor: Thanks, Alyssa. Always a pleasure to visit the studio.

AB: Well, we're glad that you're here. So recently, your team has received several referrals from our construction group for contractors looking for bonding support that are majority owned by a private equity firm. So what issues can this cause when they're looking for bonding?

MG: That's a great question to start with, Alyssa. Our traditional surety markets will push back on private equity submissions. They don't like to see goodwill and large amounts of debt listed on the balance sheet. When you throw in the limited indemnity package offered by the private equity firm in support of the bond program, we have created a perfect storm for the account to be declined without any actual underwriting taking place, but there is hope.

AB: Alright, so what can these private equity contractors do to get the bonding that they need?

MG: So first we need to take a step back to discuss the underwriting process. For our standard construction bond programs we preach one, retention of capital and two, net profit as the best ways to increase your bonding facility. The bond company will also look to both corporate and personal indemnity to ensure they're protected in the event of a bond claim. But this is indeed deep contrast to the private equity arena where the payment of monthly interest on debt and write off of goodwill often translates into a net loss on the income statement which then translates into reduced net worth. Also no personal indemnity is afforded to support the bond program instead only limited indemnity from the principle is available. Fortunately, a number of large commercial surety carriers are willing to look beyond the net worth underwriting roadblocks and concentrate more on cash flow, available bank credit, and other working capital items to consider a bonding program.

AB: Okay, so when you find the surety carrier who's willing to underwrite the bond based on things like you just mentioned cash flow, bank credit, and other working capital, what other documentation would the contractor need to prepare to provide?

MG: So we look to provide quarterly financial statement updates, work in progress schedule, exhibiting strong gross profit margins, and we communicate well in advance with our client and the surety regarding potential future acquisitions. In that way, the broker and client can get out ahead of any potential underwriting distractions.

AB: All right, so this is something that appears to become more and more common, and I'm glad that you're able to leverage your surety carrier relationships to find solutions for these contractors. So Matt, if listeners have questions about their bond program, what's the best way to get in touch with you?

MG: I can be reached at 619-937-0165 or MGaynor@RanchoMesa.com.

AB: All right. Well, Matt, thank you so much for joining me in StudioOne.

MG: Appreciate your time, Alyssa.

AB: This is Alyssa Burley with Rancho Mesa. Thanks for tuning in to our latest episode produced by StudioOne. For more information, visit us at RanchoMesa.com and subscribe to our weekly newsletter.