The Guarantees that are issued under these types of facilities are worded specifically to secure credit lines. Bank Guarantees are issued under URDG protocols (currently URDG758) and are readily accepted by most mainstream banks. They are referred to as a ‘letters of Guarantee’, however the correct term is ‘Demand Guarantees’. It is important to recognise that by using a Guarantee to secure a line of credit or loan, interest charges will apply in addition to the normal Contract Fee.
‘Leasing’ a BG
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’ BG (or ‘Leased’ Standby Letter of Credit), is rooted in todays’ financial jargon and is here to stay.
To lease a BG 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 BG as security. The Beneficiary must ensure all loans and credit lines are repaid before the expiry of the Bank Guarantee.
Who are the Providers?
Providers are a group of sophisticated investors who are able to “Lease” Bank Guarantees. These companies are recognised as Hedge Funds, Sovereign Wealth Funds, Private Equity Funds, and Larger Family Offices. They are not geographically centered but spread out through various global financial centers.
The Providers all have one thing in common, extensive balance sheets. This allows them to lend part of their asset base for ‘leasing’ Bank Guarantees or technically Collateral Transfer transactions. Inevitably, part of their portfolio will be underperforming, and assets such as Medium and Long Term Notes do not generate big returns.
Why do they act as Providers?
The Providers can utilise these assets as security for providing Bank Guarantees for Collateral Transfer transactions that will accordingly generate a better return on investment.
Bank Guarantees received under Collateral Transfer facilities may be used to Secure Lines of Credit. Typically, a bank will have no objection to offering credit against Bank Guarantees received in this manner.
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