The word ‘leasing’ when regarding to Bank Guarantees and Collateral Transfer is a misnomer and should be avoided…
Why is it called ‘Leasing’ Bank Guarantee?
The word ‘leasing’ when regarding to Bank Guarantees and Collateral Transfer is a misnomer and should be avoided.
Leasing Bank Guarantees (BG) or Leasing Standby Letters of Credit (SBLC’s) are common phrases associated with Collateral Transfer. However, leasing is not really the correct term to use as it is not possible to actually lease a bank guarantee in this manner, hence it is a misnomer.
We use the term loosely as its process is almost exactly that of commercial leasing. In effect, the Provider offers temporary ownership of his assets to the Beneficiary in return for a fee and at the end of the term the assets revert back to the ownership of the Provider. The assets are used to raise specific and non-transferable bank indemnities which the Beneficiary may utilise.
The use of the term ‘leasing’ Bank Guarantees is however inaccurate as in effect no leasing takes place. Through a Collateral Transfer Agreement, a Provider will agree to place his assets with a facilitating bank. The bank will charge the asset and will raise a bank indemnity against it in favour of the Beneficiary. This bank indemnity will commonly be in the form of a Bank Guarantee issued specifically for the purpose to the Beneficiary.
These Collateral Transfer (C/T) facilities are useful for when a business needs to import or create security (collateral) to underpin credit lines or loans, otherwise referred to as monetization.