To’ lease’ a Bank Guarantee two parties, enter into a contract – a Collateral Transfer Agreement. One party (the Provider) and owner of the asset, will transfer the Bank Guarantee to another party (the Beneficiary) for a limited period of time – usually one year. The ownership of the asset then reverts to the provider on the expiry of the Bank Guarantee. The Beneficiary will pay the Provider a “Contract Fee” in payment for the use of their asset. On receipt of the Bank Guarantee, the Beneficiary is free to approach their bank and apply for a line of credit or bank loan, (alluded to as Credit Guarantee Facilities), utilising the Bank Guarantee as security. The Beneficiary must ensure all loans and credit lines are repaid before the expiry of the Bank Guarantee.
The word ‘Leased’ in the term ‘Leased’ Bank Guarantee is in fact a misnomer, the correct technical term is Collateral Transfer. Financial historians suggest that ‘Leased’ is derived from a commercial ‘leasing’ contract that has similarities to a’ Leased’ Bank Guarantee contract. However, ‘Leased’, in the context of ‘Leased’ Bank Guarantee (or ‘Leased’ Standby Letter of Credit), is rooted in todays’ financial jargon and is here to stay.
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 the 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 on of 3% per 12-month term. This cost will differ depending on jurisdictions and currencies.
The procedures are remarkably simple. Although they vary slightly from one provider to the next, they are in general pretty similar. We have outlined the procedures in full detail to give our potential clients all the information they need.
To find out more information about Collateral Transfer or to apply via IntaCapital Swiss, please get in contact with an expert to discuss your requirements. Alternatively, please apply using our Application Enquiry Service to submit your details.
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