Collateral Transfer is the transfer of a financial instrument from one company to another. The lessee or beneficiary effectively “leases” the instrument, usually for one year. The company leasing the instrument is referred to as the Bank Guarantee Provider or SBLC Provider.
The provider and beneficiary will enter into a contract known as a Collateral Transfer Agreement. This allows the provider to transfer the collateral to the beneficiary.
There are two financial instruments that can be used in Collateral Transfer. A Demand Bank Guarantee and a Standby Letter of Credit. The Demand Bank Guarantee makes up a good 95% of the “leased” bank instrument market.
Bank Guarantee Providers and SBLC Providers provide collateral for Collateral Financing. These companies have access to a massive portfolio of assets and are recognised as Hedge Funds, Sovereign Wealth Funds, larger Family Offices and Private Equity Funds.
Demand Bank Guarantees are utilised in Collateral Transfer so companies may apply for loans and line of credit. These facilities are often referred to as Credit Guarantee Facilities. The Demand Bank Guarantee is offered as collateral to lenders in return for such facilities.
The Demand Bank Guarantee is a financial instrument issued by banks and is a guarantee of payment. It is the only Bank Guarantee that can be monetised. The verbiage is exceptionally specific and precise. It is governed by ICC Uniform Rules for Demand Guarantees, (URDG 758) and is payable on first demand.
A Standby Letter of Credit is a financial instrument issued by a bank. The main use for a Standby Letter of Credit is to underpin international trade. It is a payment of the last resort. If a buyer/importer is not creditworthy, the seller/exporter will request a Standby Letter of Credit be issued in their favour.
If the buyer fails to pay for good received, the seller will claim against the Standby Letter of Credit. Please note when used to underpin international trade a Standby Letter of Credit is never “leased”. The seller will only ever be paid if the buyer fails to perform under the terms and conditions of a Standby Letter of Credit.
When a Standby Letter of Credit is used for international trade it is a means of payment. When used in Collateral Transfer as outlined below, it is a guarantee of payment.
Collateral Transfer is a facility through which a Standby Letter of Credit can be leased for monetisation purposes. Any company wishing to “lease” a Standby Letter of Credit will have to sign a Collateral Transfer Agreement with a SBLC Provider.
When “leasing” a Standby Letter of Credit the instrument takes on the guise of a Demand Bank Guarantee. This is because the Standby Letter of Credit is now a guarantee of payment. The verbiage contained within the format will be a facsimile of the verbiage of a Demand Bank Guarantee.
The Standby Letter of Credit is now governed by ICC Uniform Rules for Demand Guarantees, (URDG 758). It is payable on first demand. This is very important when monetising financial instruments.
Here in Geneva, we are very fortunate to be one of Europe’s leading experts on Collateral Transfer. We have been successfully providing access to loans and lines of credit for over a decade.
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