Find out key information on Collateral Transfer, the correct term used for “Leasing” Bank Guarantees, Monetisation, bolt-on loans and Credit Lines.
What is Collateral Transfer?
Collateral Transfer is the delivery of assets from one party to another, often remitted in the medium of a Bank Guarantee. This process happens whereby the Providers agrees to issue the Bank Guarantee to the beneficiary in return for a rental or return, known as a Contract Fee. Both parties agree to enter into a Collateral Transfer Agreement, which governs the issuance and terms of the Guarantee.
“Leasing” a Bank Guarantee
“Leasing” a Bank Guarantee is a common phrase associated with Collateral Transfer. However, the use of the word ‘lease’ is a misnomer. Since it is not possible to physically ‘lease” a Bank Guarantee, we use the term loosely as its structure resembles that of a commercial lease. However, these arrangements should be correctly referred to as Collateral Transfer Facilities as effectively no leasing takes place.
A Bank Guarantee is issued specifically for the purpose to the Beneficiary and each contract is bespoke. A Bank Guarantee cannot be transferable, purchased or sold. A Collateral Transfer facility is granted from a Provider, using their own assets to raise a specific Bank Guarantee through their issuing bank for the sole use of the specified beneficiary, for the specified term. It is effectively a form of Securities Lending and often a derivative of re-hypothecation. There is no reference to ‘leasing’ when receiving a Bank Guarantee in this fashion.
The Guarantee is supplied by the issuing bank of the Provider to the Beneficiary’s account at the Beneficiary bank and is transmitted inter-bank via the appropriate SWIFT platform (MT760 in the case of Guarantees). During the term of the Guarantee, the Beneficiary may utilise it for their own purposes which may include security for loans, Credit Lines or for trading purposes. At the end of the term, the Beneficiary agrees to extinguish any encumbrance against the Guarantee and allow it to lapse (or return it) prior to expiry and indemnify the Provider against any loss incurred by default of loans secured upon it.
Who provides Collateral Transfer?
A Provider will often be a collateral management firm, a hedge fund or private equity company. Effectively, the Guarantee is ‘leased’ to the Beneficiary as a form of investment since the Provider receives a return on his commitment, hence the misnomer of the term ‘leasing’.
Over recent years, these facilities have become more popular since they enable the Beneficiary to have access to substantial credit facilities by using the Guarantee as loan security. Since the Guarantee is effectively imported to the account of the Beneficiary, the underwriting criteria is considerably less than that of conventional lending.