What is a ‘Leased’ Bank Guarantee?

A ‘Leased’ Bank Guarantee is a misnomer, whereas the technical term is Collateral Transfer. The generally agreed definition of Collateral Transfer, is the provision for collateral, from one company, (The Provider), to another company, (The Beneficiary), where the collateral is often represented by a Demand Bank Guarantee and is loaned for a temporary period, the ownership returning to the Provider on expiry of the Bank Guarantee.

For legal purposes, the Beneficiary and the Provider enter into a contract, the Collateral Transfer Agreement, which upon successful due diligence by the Providers bank, (The Issuing Bank) and the Beneficiary’s bank, (The Receiving Bank), the Beneficiary, will transfer a pre-agreed payment, the Contract Fee, to the Provider, representing the temporary utilisation of the Bank Guarantee. The Issuing Bank, will transfer the Bank Guarantee to The Receiving Bank by SWIFT, (“Society for Worldwide Interbank Financial Telecommunications”), using the designated swift message MT 760, dedicated to Bank Guarantees and Letters of Credit.

The Demand Bank Guarantee is a specific instrument utilised in Collateral Transfer Agreements, and governed by ICC Uniform Rules for Demand Guarantees, (URDG 758), and it is therefore the verbiage in that governs its usage by The Beneficiary, who usually applies to their banks for loans and lines of credit, referred to as Credit Guarantee Facilities.

It is now possible for IntaCapital Swiss by utilising the Collateral Transfer Facility, to offer cheaper access to loans and lines of credit, as they have reached agreement with The Providers, (Sovereign Wealth Funds, Hedge Funds and Larger Family Offices), to reduce their Contract Fees for Collateral Transfer, thus making available Credit Guarantee Facilities to the smaller company.

Collateral Transfer is a hugely popular facility, especially in the current financial markets where there is a drought regarding access to credit facilities. In today’s world, IntaCapital Swiss, by utilising the Collateral Transfer Facility, has brought the availability of Credit Guarantee Facilities, to a new and impoverished market.

Leased, Loaned and Rented are just some of epithets given to a Bank Guarantee that the owner, (The Provider) has transferred to the Beneficiary, on a temporary basis. The name that has stuck over the years is ‘Leased’ Bank Guarantee, whereas the Technical term is Collateral Transfer or C/T Facility. The word Leased appears to be derived from commercial leasing as the contract is similar to that of a C/T Facility.

The ‘Leased’ Bank Guarantee is transferred by the Issuing Bank to the Beneficiary’s account at their Bank (The Receiving Bank), for a temporary period, usually one year. The Beneficiary pays the Provider a fee for this transaction, and at the end of the period or expiry date, the Bank Guarantee reverts to the ownership of the Provider. The Beneficiary utilises the Bank Guarantee for a number of purposes, the most popular being a loan or a line of credit, referred to as Credit Guarantee Facilities, for which the Beneficiary will require a Demand Bank Guarantee.

A ‘Leased’ Bank Guarantee has become a most sought after instrument, and as such a Provider is in constant demand. The C/T Facility model includes access to many Providers who range from International Corporations to Family Offices and a cross-section of funds such as Sovereign Wealth, Private Equity and Hedge Funds. These companies have access to an array of assets such as cash, gold, shares and bonds, to mention but a few, to use as collateral against issuing Bank guarantees.

‘Leased’ Bank Guarantees do not carry a credit rating as they cannot be bought or sold and are designated as a non-tradeable asset and accordingly are applied to the Beneficiary’s account as “Value Received”. This asset class therefore cannot be issued with a credit rating, placing lending bankers, who are bound by internal compliance and credit regulations, in a difficult situation regarding approval of loans and lines of credit. However, if history shows the Issuing Bank has not defaulted on any claims against their Bank Guarantees, this will give the lending banker the comfort they require to approve loans and line of credit using the Bank Guarantee as collateral.

Today numerous Receiving Banks are utilising the Demand Bank Guarantee via the unique C/T Facility, as collateral for issuing loans and lines of credit. The Issuing Bank and Receiving Bank, will expertly due diligence the loan and collateral contracts, and together with the Provider and Beneficiary will ensure that the transaction is a success.itting bank is designated as “The Issuing Bank” and their client who is providing the Bank Guarantee is designated as “The Provider or Applicant”.

Standby Letters of Credit (SBLC’s) and Documentary Letters of Credit (DLC’s), are often compared incorrectly with Bank Guarantees (BG’s). For information purposes, a Bank Guarantee is a SECURITY for a payment whilst a Standby Letter of Credit and a Documentary Letter of Credit are a Means of Payment.

When requesting a Bank Guarantee companies must remember that from a legal standpoint, Bank Guarantees are governed by the laws of the country where the Issuing Bank is domiciled. It is prescient therefore, for companies to study Bank Guarantees on an individual basis as corporate laws differ from country to country.

A Bank Guarantee can be issued by a third party, have varying verbiage and be applied to different transactions. In certain circumstances, a bank under instructions from their client can instruct their correspondent bank to issue a Bank Guarantee on their behalf. This instrument is referred to as an indirect guarantee. Where a bank issues a Bank Guarantee to direct to another bank this instrument is referred to as a direct guarantee. It is however, pertinent to point out the differences between a Performance Guarantee or Surety Bond and a Bank Guarantee. Whilst a Bank Guarantee is invariably paid on DEMAND, a Performance Guarantee or Surety Bond only pays SUBJECT TO certain criteria being met.

Credit Facility Guarantees, are represented by loans, capital injections and lines of credited. Companies looking to raise a line of credit can utilise the Collateral Transfer Facility, which employs the use of Demand guarantees. Demand Guarantees have definitive verbiage as set out by ICC Uniform Rules for Demand Guarantees (URDG 760), and are payable on FIRST DEMAND.

The use of Bank Guarantees is a favoured option amongst the clientele of IntaCapital Swiss, who offer the Collateral Transfer Facility as a means whereby their clients can receive a Bank Guarantee on their bank account. This is an excellent opportunity to raise cash for project finance because as in most cases the client will use the Bank Guarantee to apply for a line of credit from their bankers.

Once the Bank Guarantee has been received on their bank account the client can forward their credit line application to their bankers, though normally this is agreed in advance. In the past, a few clients have advised that their bankers have turned down their application for a credit line. The reasons are varied but it is down to the relationship between the client and their bankers.

IntaCapital Swiss being fully aware that client’s bankers can from time to time reject applications for credit lines, are in the unique position of being able to replace their client’ bankers and offer them a line of credit.