How does Renewal Work and the costs

How does renewal work and what are the renewal rates / costs? Collateral Transfer facilities are issued for 12 month periods and multiples thereof. However, most facilities are offered initially as 12 month contracts with an option to renew for a further 12 months (year on year), up to a maximum of 60 or 72 months…

How does renewal work and what are the renewal rates / costs?

Collateral Transfer facilities are issued for 12 month periods and multiples thereof. However, most facilities are offered initially as 12 month contracts with an option to renew for a further 12 months (year on year), up to a maximum of 60 or 72 months.

The initial contract will be issued with a fixed Contract Fee, typically between 6% to 8%. At renewal, the collateral (Bank Guarantee or Standby Letter of Credit) will expire in the usual way and a new annual collateral will be issued for the re-calculated Contract Fee which is payable yearly in advance, i.e. immediately upon receipt of the new collateral. The calculation equation will be stated in the initial contract so there is full transparency and are no surprises. Typically, the Contract Fee for the second and subsequent years will be calculated as a percentage (typically between 5.50% and 7.50%) above 12 month LIBOR or EURIBOR.

This means that as LIBOR and EURIBOR (12 month rates) do fluctuate a little, so the Contract Fee can change year on year in relation to this. However, both of these rates have been extremely stable for the last several years but ultimately the risk of increasing rates will be burdened by the Recipient and not the Provider.

As both 12 month EURIBOR and LIBOR rates are very low at this time, Collateral Transfer facilities have been in great demand. We would expect that the demand for such facilities may fall off a little if these rates were to increase, due to the sheer fact that these facilities are not a cheap alternative to conventional finance, but moreover an accessible, convenient and fast solution.