BANK GUARANTEE and STANDBY LETTER OF CREDIT

We are a financial broker having been in the business for over 15 years and have built up many connections in the financial world ranging from bank guarantees, standby letter of credit, stock loans, commercial mortgages all the way through to development financing for the UK, Europe United States and many more countries around the world. Over the years we have built up an extensive relationship with many providers of bank guarantees, stand by letters of credit or in short collateral transfer products. We are here to help you navigate the sometimes unclear work of collateral transfer and if you read further down this website we have a lot more information to help you understand collateral transfer and how we can help you or your company with raising funding.

We provide and arrange delivery of certified BG (Bank Guarantee), SBLC (Stand by Letter of Credit) from AAA Rated  worlds top 100 Banks to any BG country coordinates our clients choose. We also offer a managed Bank Guarantee program where we Issue and Monetize the BG/SBLC for you from our certified monetizer companies.

Our institutions can work with Bank Guarantees and Stand By Letters of Credit in EUR, GBP and CHF currencies only. We do not work with USD denominated BG’s or SBLC’s from countries such as Africa, Panama, Venezuela, BVI, Cayman Islands etc. You can find the list of high risk and monitored countries on the FATF website that we do not work with here.

 

WHAT IS A BANK GUARANTEE? (BG)

Bank Guarantee (BG) is very similar to a Letter Of Credit (LC) as they both are used for many types of business transactions (financial or performance based). The real difference between the two is that a Letter Of Credit (LC) ensures that a business transaction goes as planned, whereas a Bank Guarantee (BG) reduces losses if a business transaction doesn’t go as planned. A Bank Guarantee (BG) guarantees a certain sum to the beneficiary if the opposing party doesn’t fulfill its specific obligations under their agreed upon contract. Bank Guarantees (BG) ensure both sides in a contractual agreement from credit risk.

  • A construction company and its steel beam supplier may enter into a contractual agreement to build a new complex.
  • Both sides might have to issue Bank Guarantees (BG) in order to prove their credit-worthiness to each other.

In a case that the steel beam supplier fails to deliver steel beams to the job site per their agreed contractual agreement, the construction company would notify the issuing bank of the breach of terms agreed up in the Bank Guarantee (BG) and the bank would then pay the construction company the amount agreed upon in the Bank Guarantee (BG).

 

Particulars

Letter Of Credit

Bank Guarantee

NatureLOC is an obligation accepted by a bank to make payment to a beneficiary if certain services are performed.BG is an assurance given by the bank to the beneficiary to make the specified payment in case of default by the applicant.
Primary liabilityBank retains the primary liability to make the payment and later collects the same from the customer.The bank assumes to make the payment only when the customer defaults to make payment.
PaymentBank makes the payment to the beneficiary as and when it is due. It need not wait for a default to be made by the customer.Only when the customer defaults the payment to the beneficiary, the bank makes the payment.
Way of workingLOC ensures that the amount will be paid as long as the services are performed as per the agreed terms.BG assures to compensate for the loss if the applicant does not satisfy the specified conditions.
Number of parties involvedThere are multiple parties involved here – LOC Issuing bank, its customer, the beneficiary (third party), and advising bank.There are only three parties involved –  banker, its customer, and the beneficiary (third party).
SuitabilityGenerally, this is more appropriate during the import and export of goods and services.Suits any business or personal transactions.
RiskBank assumes more risk than the customer.Customer assumes the primary risk.

 

HOW DOES THE BANK GUARANTEE (BG) PROCESS WORK?

Bank Guarantee Closing Process

Step 1: Application 

Fill out and return the Bank Guarantee (BG) application with the documents for your deal. (Contract, Agreement, etc.) to the bank guarantee lender.

Step 2: Issuing of Draft

A SWIFT MT760 draft of the Bank Guarantee (BG) will be created for you and your beneficiary to review.

Step 3: Draft Review and Opening Payment 

a) Finalize the draft between you and your beneficiary and sign off on the draft (changes are free of cost).​

b) We issue you a payment invoice for the BG, which you arrange to pay.

c) Once we receive your wire payment, we will release the finalized Bank Guarantee (BG) to the bank for issuance and delivery.

Step 4: Issuance

More often than not, the bank will issue the Bank Guarantee (BG) within 48 hours of release.

Once issued, a copy of the BG will be emailed to you as it is transmitted by a MT760 SWIFT message to the beneficiary, including the reference number of the BG.

Your seller’s bank will be able to receive and confirm the Bank Guarantee (BG) transmission soon thereafter from the bank guarantee lenders offer department.

WHAT ARE TYPES OF BANK GUARANTEES? (BG)

There are many different types of bank guarantee and we have listed some of them below.

1. Bid Bond Guarantee: 

Is issued as part of the bidding process between a contractor and the project owner, in order to guarantee that the winning bidder will undertake the contract under the term sand conditions that they bid.

2. Performance Bond Guarantee: 

A surety bond usually issued by a bank to guarantee the satisfactory completion of a project by a contractor.

Also known as a contract bond.

3. Advance Payment Guarantee: 

Is utilized whenever a contract includes advance payment to be made to the seller.

It guarantees that this advance payment will be returned to the buyer if the seller happens to not fulfill its obligation to the seller.

4. Warranty Bond Guarantee:

A type of security bond that states that the contractor has a history of trustworthiness.

It also protects the client should the work completed be subpar or unethical in any way.

5. Payment Guarantee: 

A financial commitment that requires a debtor to make a repayment due to terms outlined in the debt agreement.

6. Rental Guarantee: 

A type of insurance used to protect landlords against loss of rent.

7. Letter of Indemnity: 

A letter that guarantees certain contractual provisions will be met or financial reparations will be made.

Guarantees that losses will not be suffered if the contractual provisions aren’t met.

8. Confirmed Payment Order Guarantee: 

A guarantee of payment on a certain due date on top of the letter of credit issuing bank’s own commitment to pay the supplier.

Whats The Process

We are currently offering a Non-Recourse Loan against a Performance Bank Guarantee (BG/SBLC) as collateral with our Monetization Program. The Program allows you to generate Investments Funds which can be used for trade finance, constructions, credit enhancement, government funding, property investment and all round range of funding. We can provide 100% LTV Non-recourse loan with our BG Leased Monetization Program. Find below Our Transactional Procedures and Bank Transmission charges for the Delivery of our Cash Loan from our financial institution. This sums up the bank guarantee process.

OUR PROCEDURE:

1: The Lender shall carry our Financial, Corporate and Due diligence investigations on the Borrower’s company after the successful investigation and confirmation of the authenticity Borrower’s company/ identification by our legal department, the Lender and Borrower execute, sign and initiate this Deed of Agreement, which thereby automatically becomes a full commercial recourse contract to be lodge by both parties initiation of Swift Transmission.

2: Within Three (3) Banking Days after the Legal department has successful verified the authenticity of the Borrower’s document, Our financial department shall send a copy of Letter Of Intent to Complete, Sign and Stamp.

3: Within Two (2) Banking Days after the financial department has received and Confirm the Borrower’s sign and stamp Letter of Intent, Lender will issue a copy of Signed Contract to the Borrower to Complete and stamp then send back Countersigned to the Borrower to complete contract.

4: Within One (1) Banking day after the Lender receives from the Borrower, the Countersigned Contract, The Lender will send a copy of Advance payment guarantee APG or payment refund guarantee PRG that will be duly be signed and stamped by the lender’s bank which guarantees that any delay or default from the Lender side, on Borrower’s first request to our bank any payment made in advance will be refunded along with 1% penalty fees and the signed and seal Payment Invoice. The Borrower will make only 50% payment of the Bank Transmission, Administrative & Handling charges for the Non-Recourse Loan via Swift MT103 by direct wire transfer into the Lender’s provided Banking .

5: Within Three (3) banking days after confirmation of receipt of payment for 50% of the Bank Transmission, Administrative & Handling charges for the Non-Recourse Loan via Swift MT103 in Lender’s nominated bank account, the Lender will deliver Non-Recourse Loan (Cash Loan) via Swift MT103 to the Borrower’s Provided Bank Account.
Borrower sends out leasing fees 5% LTV per annul by Swift MT103 to the Lender’s nominated Bank account with the initially 50% balance of Bank Transmission, Administrative & Handling charges by wire transfer

6: Within Five (5) Banking days upon delivery and confirmation of the Non-Recourse Loan via Swift MT103 in the Borrower’s nominated Bank account
Any unauthorized calls by any party or its representative lawyers to probes or communication in an improper way to bank(s) in this transaction shall be prohibited and contract terminated
The 5% LTV will only be paid for 10 years and after which the Loan becomes Non-Recourse.

NOTE: You are only to pay in advance 50% of the required processing fees in order to complete and successfully acquire the loan from our financial institution.

Why you Should Choose us?

1). Guarantee: We guarantee the ultimate successful Funding of your Projects. In the case of fail, we return 100% of the swift Fee Paid with 1% penalty fee.

2). Speed: It takes up to 5-10 business days to fund your Project or SBLC monetization.

3). Reliability: Trust is important for us. We fund entrepreneurs to run their businesses successfully already since 2012.

4). Experience: Our experienced professionals will consult you about all the steps that should be done after contacting our Legal Department. We have developed and time-tested approaches for all the operations.

5). No risk: The Advance payment guarantee APG or payment refund guarantee PRG will be duly signed and stamped by the Lender’s bank which means the Fee is 100% secured, we are helping our clients get funded with minimum cost.

6). Insurance: Set up insurance right for you and your business and We help client insure their projects, even if their projects fails they have no worries as the insurance company covers the Loss.

Leasing a Bank Guarantee is Collateral Transfer

The phrases ‘Lease’ or ‘Leasing’ of Bank Guarantees stem from the way a Collateral Transfer transaction is structured. This guide explains why misleading phrases such as ‘leasing a bank guarantee’ or ‘bank guarantee lease’ – or other form of demand guarantee including a Standby Letter of Credit – has been confused with Collateral
Transfer facilities. So, why do they call it ‘Leasing’ Bank Guarantees? The phrases ‘Lease’ or ‘Leasing’ of Bank Guarantees originate from the basis a Collateral Transfer transaction is structured (as we shall discuss in
detail later on this website). The word ‘leasing’ in direct respect to a Bank Guarantee, Standby Letter of Credit or other form of ‘demand guarantee’ is a total misnomer and should really be avoided; although we all accept that people use this layman terminology when referring to finance facilities involving the implementation of bank instruments such as these bespoke funding contracts. As we have discussed, Leasing Bank Guarantees or Leasing Standby Letters of Credit (or other types of Demand Guarantees for that matter) are common mis-phrases associated with Collateral Transfer facilities. Therefore, words such as ‘Lease’, ‘Leasing’ or ‘Rent’ are not really the correct terms to use as it is not possible to actually lease a Bank

What’s in it for me?

A large percentage of applicants that apply to receive a Bank Guarantee or Standby Letter of Credit through a Collateral Transfer facility are doing so with the intention of raising credit or securing loans. It is often the case that applicants do not have sufficient existing security to allow them to borrow the level of funds they require from their own bank or it may be that they have simply extended their credit too far. Sometimes the objective is to raise funds for new start companies, trade positions and large projects. As Collateral injected under Collateral Transfer facilities is worded to support credit facilities, it is possible to use it to secure credit lines and loans, either directly from the Recipient Bank holding the Collateral or another third-party lender. In these events, Our lenders are happy to offer credit line facilities that we can secure and facilitate for
our clients. Collateral Transfer facilities (‘leasing’) such as bank guarantee letter may also be used to enhance financial positions, enter trading programmes, secure documentary letters of credit, issue contract guarantee, guarantee supplier’s
payments and many other uses.

So, why do they call it ‘Leasing’ Bank Guarantees?

The phrases ‘Lease’ or ‘Leasing’ of Bank Guarantees originate from the basis a Collateral Transfer transaction is structured (as we shall discuss in detail later in this series). The word ‘leasing’ in direct respect to a Bank Guarantee, Standby Letter of Credit or other form of ‘demand guarantee’ is a total misnomer and should really be avoided; although we all accept that people use this layman terminology when referring to finance facilities involving the implementation of bank instruments such as these bespoke funding contracts. As we have discussed, Leasing Bank Guarantees or Leasing Standby Letters of Credit (or other types of Demand Guarantees for that matter) are common mis-phrases associated with Collateral Transfer facilities. Therefore, words such as ‘Lease’, ‘Leasing’ or ‘Rent’ are not really the correct terms to use as it is not possible to actually lease a Bank Guarantee in the exact meaning of the word ‘lease’. Equally, it is not possible to lease a Standby Letter of Credit, Documentary Letter of Credit (DLC) or any other form of demand guarantee (as defined by the Uniform Rules for Demand Guarantees Publication (No. 758 – ‘URDG758’).

It is also not possible to buy or purchase Bank Guarantees, Standby Letter of Credit or other forms of demand guarantees (as defined by URDG 758). Likewise, it is not possible to sell them, as we explain later on this webpage.

Hence, the phrase to ‘lease a bank guarantee’ is a misnomer. As we have over 150 years of experience within this industry, we see inexperienced brokers, intermediaries and suspicious entities claiming to be ‘providers’ of these facilities, using this wrong terminology in formal documents. We assume that inexperienced middle-men have grasped these incorrect terms as the Collateral Transfer process mirrors almost exactly that of the process of commercial leasing. In effect, the Provider offers temporary ownership of his assets to the Recipient 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 Recipient may utilise.

It is therefore a misnomer as in effect no leasing takes place. Through a Collateral Transfer Contract (the underlying agreement to a Collateral Transfer facility), a Provider will agree to place his assets with a facilitating
bank. That bank will be the bank the Provider nominates to issue the Collateral and is referred to as the ‘Issuing Bank’. Typically, that asset being pledged to the Issuing Bank as the underlying substance of the Collateral, will be physical cash or a form of instantly liquid-able stock or commodity such as listed shares or gold bullion or an asset the bank can immediately liquidate.

The Issuing Bank will lien (charge or ‘block’ in their own favour) the asset and will raise a bank indemnity (guarantee) against it in favour of the Recipient (referred to as the Beneficiary in reference to the Bank Guarantee verbiage), in accordance with the instructions of the Provider. The bank indemnity in this case being the Collateral.

As we have learned earlier, this Collateral will commonly take the form of a Banker’s Letter of Guarantee (a Bank Guarantee) issued to the Recipient,specifically for the purpose to which the Collateral Transfer facility refers. Sometimes, the Collateral may be in the form of a Standby Letter of Credit or another form of specific demand guarantee, depending on jurisdiction of the transaction and the parties. It will also be dependent upon its purpose and the specific bespoke terms of the underlying Collateral Transfer Contract or Agreement.

Collateral Transfer facilities are extremely practical when a company or corporation needs to import, enhance or create additional security to support further credit lines or loans. A corporation may seek to introduce secondary or additional ‘collateral’ through these types of facilities to enable it to offer the necessary loan security to their bankers and lenders.

Borrowing funds using a Bank Guarantee or other form of bank indemnity or demand guarantee as security is often referred to as ‘monetizing the guarantee’. One who lends funds against a bank instrument or collateral of this type is often called ‘a Monetizer’. These terms are very much broker speak or slang that one may find surfing the internet. In a professional environment, loans secured against bankable collaterals of this type are traditionally and correctly called ‘Lombard Loans’.

I Need This Facility to Find and Secure a Loan

Most of those who seek a ‘Lease Bank Guarantee’ (or standby letter of credit) have the objective to raise hard, physical cash, either by using the Bank Guarantee (BG) as security for a loan or to ‘discount’, ‘monetize’ or ‘credit line’ the Guarantee. Most commonly, those seeking to lease a Bank Guarantee or Standby Letter of Credit (SBLC) or irrevocable standby letter of credit are effectively seeking a loan where they have little or no established security (e.g. real estate, bonds or investment deposits) to offer conventional lenders such as their bank or other lending companies.

Inadequate Loan Security?

Little or inadequate security should not be an impassable barrier preventing you from obtaining suitable financial facilities, loans or credit if you have access to a Collateral Transfer facility.

A correctly structured Collateral Transfer facility will allow you to utilise the underlying asset (the Bank Guarantee or other form or security medium) as loan or credit security provided you have made the necessary provisions. Those provisions will be explained in detail within the Collateral Transfer Contract or Agreement document you entered with your Provider.

If you have not used a professional to structure and obtain your Collateral Transfer facility and perhaps have already obtained an investment from a third party investor, lender or funder and have (or about to receive) their investment via the medium of a Bank Guarantee or standby letter of credit, it is often possible to use that guarantee as loan or credit security. However, it will depend almost entirely on the terms and conditions you had negotiated (or were provided) by your investor or provider at the outset.

It is important to note that prior to entering into any investment contract or other type of agreement to receive a bank guarantee (or standby letter of credit) where on that basis resembles a ‘lease’ type arrangement and where that structure is not in conformity with a professionally structured Collateral Transfer facility, that you make clear from the outset that your intention is to utilise that guarantee as loan or credit security, either directly or indirectly. Failure to do so may impair the use of the guarantee. It is not just how the Guarantee is worded that reflects its use, but also the underlying agreement terms need be observed to avoid breaking or breaching contract with your investor or provider. You may not be able to utilise it in the manner you thought and you may end up paying a lot for something that is completely useless!

You Have To Be Careful In The Decisions You Make And The Partnerships That You Build

Like the sub-prime loan industry and the pay-day loan sector, this territory accommodates many unscrupulous dealers and providers that may offer facilities far beyond their capability of delivery and performance. We advise you how to avoid making school-boy errors and avoid those unscrupulous brokers who dwell online and the pitfalls associated with these types of financial facilities.

Raising Loans And Credits Against So-Called ‘Leased’ Instruments

As we learned earlier, the words and phrases ‘Lease’ and ‘Leasing’ stem from the way a Collateral Transfer transaction is structured. The Bank Guarantee (or other form of guarantee such as an SBLC for example), that you have negotiated (or perhaps are in the process of negotiating) in order for you to raise capital, loans or credit, can never be leased in the actual sense of the word.

It is a total misnomer to use the word ‘leasing’ in direct respect to a Bank Guarantee, Standby Letter of Credit or other form of ‘demand guarantee’. Having said that, we all accept that people use this layman terminology when referring to finance facilities involving the implementation and investment mediums of bank instruments such as those employed in Collateral Transfer facilities. Likewise, it is not possible to purchase, buy, sell or exchange bank guarantees like they were toffee apples or hot cakes.

We advise that you steer well clear of those unscrupulous dealers that tell you or advise you otherwise. Most do not grasp the real concept of Collateral Transfer and only hope to mislead, confuse and relieve you of money.

Unlike a conventional investment contract where an investor will agree to invest money (cash) into a business or corporation for a given period in the hope to obtain a reasonable return (sometimes the return is fixed and pre-agreed, sometimes it is unknown at the time of the investment), a Collateral Transfer facility is a much more rigid form of investment contract.

By successfully obtaining a ‘Leased’ Bank Guarantee (or Standby Letter of Credit) facility – correctly referred to as a ‘Collateral Transfer Facility’, will enable you and your corporation to obtain and easily secure future
loans, credits and finance and enhance your corporate value. Above all, it will mean that you can meet your financial objectives, clearly and with minimum risk. Allow us to guide you through the process at your own speed, knowing you are in the care of industry professionals.

This web page goes together to form a very informative and comprehensive guide, gives you the foundation and background needed to fully understand these facilities, how they work, how to avoid the cowboys and how to successfully apply to give you the best chance of being accepted by credible, flexible and competitive providers.

Obtaining Loan and Credit Facilities

If you have not obtained the bank guarantee (or other form of bank instrument) through a structured Collateral Transfer facility, it is important that you study the Contract or Agreement that you entered into with your provider. Ensure that the terms and conditions of entering into contract to receive a collateral instrument in this way with your provider or investor, does not restrict you in using it to borrow, secure or raise loans and credits.

As we have discussed earlier, the reason that these facilities are confused with ‘leasing’ is that the actual collateral instrument (the bank guarantee or SBLC) you have (or are about to) receive, is that it has
an expiry date and that the underlying asset and any value of the guarantee (if one can call it that), does not belong the beneficiary.

It is moreover the property of the Provider who has allowed you the use of it (has invested the use of it within your business), in return for a fixed or calculated fee (the Contract Fee), for a given period of time (the Term). Remember, at the end of the Term, you must make arrangements to firstly:

(a) clear any direct liens or encumbrances over the collateral you have placed, (this includes mortgages, loan charges and liens), and
(b) either allow the collateral (the bank guarantee) to expire without lien or encumbrance, or return it to the Provider without claim or hindrance.

Therefore, unless you have very clear and identifiable exit (repayment) strategies, it is not advisable to use the bank guarantee as a direct security for a loan. In fact, since Bank Guarantee’s are not assignable nor
transferable, it is more complicated to use a Guarantee as direct security for a loan or credit, unless that Guarantee is issued (or re-issued) direct to the Lender granting you the loan or credit facility, by the bank issuing the Guarantee. In this case, you are no longer the Beneficiary and the entire structure of the deal is altered.

Important Note: Guarantees and Standby Letters of Credit received as security for a transaction, a sale of goods or import/export contract are highly unlikely to be accepted by bona-fide and credible lenders as loan or credit security. Therefore, if you have received a Bank Guarantee, Standby Letter of Credit or other form of bank instrument as a guarantee for payment, it is not advisable that you attempt to utilise it as loan security without the prior consent of the issuer and the applicant.

However, a professionally devised and structured Collateral Transfer facility will be designed specifically to meet the objectives and intention of the party. If their intention is to raise funds against the Guarantee, then it
will be designed for that purpose. In these ways, Lender’s granting loans and credit against bank guarantees and other forms of bank instruments, will take an indirect lien over the collateral. This is done in many different ways, dependent upon the borrower’s requirements.

Therefore to recap:

(1) Although Bank Guarantees may be worded correctly to allow their use to secure loans and credits, this is not always possible and is also dependent upon the underlying contract or agreement with your investor
or provider.
(2) Guarantees received under Collateral Transfer facilities, professionally designed and structured are more suited to allow loans and credit to be secured against the supporting collateral’s (the Bank Guarantee or Standby Letter of Credit).
(3) Lenders will take an indirect lien or mortgage over the Guarantee as their loan security OR may insist that the Guarantee is issued (or re-issued) in their direct name by the issuing bank prior to making any loan advance, removing you as the beneficiary of the Guarantee.
(4) It is important to note that you should not attempt to borrow loans or secure credit against guarantees and SBLC’s provided to you as a guarantee of payment which is dependent or subject to delivery of goods
or service.
(5) Also note that Bank Guarantee’s are not transferable or divisible. They cannot be assigned, transferred (moreover need to be re-issued). They cannot be bought or sold.

What Exactly is a Bank Guarantee and a Standby Letter of Credit?

What is a Bank Guarantee (BG)?

A Banker’s Letter of Guarantee issued by a bank is often referred to as a ‘Bank Guarantee’. In essence, a Bank Guarantee is an undertaking made on behalf of an Applicant to make payment to the Beneficiary in the happening of a specified event.

There are many different types of Guarantees, but those used in these types of facilities relate to guarantees to secure the repayment of credit. These types of Guarantees are worded to allow the Recipient (the Beneficiary) to utilise them as security for loans, obligations and other credit facilities.

Any Guarantee issued by a bank will be secured or underpinned by liquid assets of the applicant, typically cash, stocks or gold bullion or other form of instantly liquidable securities charged or otherwise ‘blocked’ by the issuing bank.

There is a common misunderstanding that some Guarantees are underpinned with illiquid assets and that unless a Guarantee is seen to be ‘cash-backed’ it is of less value or credence than a Guarantee issued by
the same bank that is underpinned and secured by cash. This is totally wrong. Whether a Bank Guarantee is underpinned by cash, gold, stocks or another asset, the strength and credence of a Guarantee is that of the
issuing bank, nothing else.

There are also Direct Guarantees and Indirect Guarantees. A Direct Guarantee is issued from by the Issuing Bank direct to the Receiving Bank. In contrary to an Indirect Guarantee where the Applicant asks a Counter-Guarantor who’s credit worthiness is more acceptable to the Issuing Bank, opens the Guarantee in favour of the Issuing Bank and the Issuing Bank issues the Guarantee to the Beneficiary.

In Collateral Transfer only Direct Guarantees are used. It should be noted that Bank Guarantees are not confirmed by other banks unlike Standby Letters of Credit which, under certain circumstances and conditions, can be confirmed.

What is a Standby Letter of Credit?

Also called a Standby L/C or simply ‘SBLC’. As with a Bank Guarantee, it serves as a guarantee to secure a payment or performance obligation. It is used more commonly in the United States and Far East Asia, whereas Europe tends to favour Bank Guarantees. There are many different SBLC providers out there in the financial markets.

Unlike a Bank Guarantee, a Standby Letter of Credit can (under certain circumstances) be confirmed by the advising bank. Whilst the structure of a Standby L/C is different to that of a Bank Guarantee, the results are the same and that it is a form of Demand Guarantee.

What is a Demand Guarantee?

A Demand Guarantee, sometimes referred to as an autonomous or an independent Guarantee, is an irrevocable undertaking issued by a Guarantor (commonly a Bank) upon receipt of instructions of an Applicant, to pay a Beneficiary a certain sum of money that may be demanded by the Beneficiary up to a maximum amount as will be stated in the Guarantee itself, upon submission of a formal demand to the Guarantor that complies with the terms of the Guarantee, as it is written.

There are many different forms of Demand Guarantees and the use of each shall depend on the circumstances and purpose of the Guarantee. In Collateral Transfer facilities, it is typically a Bank Guarantee worded to secure credit and loans or a Standby L/C.

URDG 758 in relation to Bank Guarantees?

The phrases ‘Lease’ or ‘Leasing’ of Bank Guarantees stem from the way a Collateral Transfer transaction is structured (as we shall discuss in detail later in this guide). The word ‘leasing’ in direct respect to a Bank Guarantee, Standby Letter of Credit or other form of ‘demand guarantee’ is a total misnomer and should really be avoided; although we all accept that people use this layman terminology when referring to finance facilities involving the implementation of bank instruments such as these bespoke funding contracts.

As we have discussed, Leasing Bank Guarantees or Leasing Standby Letters of Credit (or other types of Demand Guarantees for that matter) are common mis-phrases associated with Collateral Transfer facilities.

Therefore, words such as ‘Lease’, ‘Leasing’ or ‘Rent’ are not really the correct terms to use as it is not possible to actually lease a Bank Guarantee in the exact meaning of the word ‘lease’. Equally, it is not possible to lease a Standby Letter of Credit, Documentary Letter of Credit (DLC) or any other form of demand guarantee (as defined by the Uniform Rules for Demand Guarantees Publication No. 758 – ‘URDG758”).

It is also not possible to buy or purchase Bank Guarantees, Standby Letter of Credit or other forms of demand guarantees (as defined by URDG 758). Likewise, it is not possible to sell them, as we explain later in this guide.

Hence, the phrase to ‘lease a bank guarantee’ is a misnomer. As we have over 150+ years of experience within this industry, we see inexperienced brokers, intermediaries and suspicious entities claiming to be ‘providers’ of these facilities, using this wrong terminology in formal documents. We assume that inexperienced middle-men have grasped these incorrect terms as the Collateral Transfer process mirrors almost exactly that of the process of commercial leasing. In effect, the Provider offers temporary ownership of his assets to the Recipient 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 Recipient may utilise.

It is therefore a misnomer as in effect no leasing takes place. Through a Collateral Transfer Contract (the underlying agreement to a Collateral Transfer facility), a Provider will agree to place his assets with a facilitating
bank. That bank will be the bank the Provider nominates to issue the Collateral and is referred to as the ‘Issuing Bank’. Typically, that asset being pledged to the Issuing Bank as the underlying substance of the Collateral, will be physical cash or a form of instantly liquid-able stock or commodity such as listed shares or gold bullion or an asset the bank can immediately liquidate.

So what is Collateral Transfer?

Sometimes called ‘Collateral Provision’, a Collateral Transfer facility is where an investor (often an equity house, hedge fund or private consortium) enters into contract with a corporation to provide investment capital. However, unlike conventional investments, in these types of facilities the investment capital is not injected as ‘cash’, but rather in the form of a Guarantee or ‘promise to pay’.

The form of the investment is often made via the medium of a Bank Guarantee (or sometimes via a Standby Letter of Credit or an SBLC Letter of Credit, depending on the jurisdiction, purpose and objectives of the investment).

Unlike a conventional investment contract where an investor will agree to invest money (cash) into a business or corporation for a given period in the hope to obtain a reasonable return (sometimes the return is fixed and pre-agreed, sometimes it is unknown at the time of the investment), a Collateral Transfer facility is a much more rigid form of investment contract.

For example, the amount of the investment, its term and the return is fixed at the outset and can very rarely be altered or changed once the contracts commence. Sometimes, the investment return may be linked to EURIBOR or LIBOR rates but typically the rates are fixed for the duration of the contract.

Collateral Transfer is a preferred method of investment where the investor does not wish to become involved with holding equity of the corporation (nor have the responsibility of the management of loans), but would
rather seek a fixed return for a fixed period with minimal risk and minimal management intervention. This is achieved as the investor (referred to as a ‘Provider’ in Collateral Transfer facilities) does not place his money directly with the corporation (referred to as the ‘Recipient’). Instead, he will set aside those monies on his own account at his own bank.

The Provider will enter into contract with the Recipient to remit them the investment at the Recipient’s Bank. This Contract governs the issuance of the Collateral (the Bank Guarantee) and sets the terms, the jurisdiction and platform of performance of the transaction and of course the rates and returns. This contract is often referred to as the Collateral Transfer Contract/Agreement or simply the ‘Collateral Offering’ (as one would expect with a mortgage offer or loan document).

The Provider will instruct his bank to issue to the Recipient Bank, their Letter of Guarantee (a Bank Guarantee) or a more suitable bank instrument depending on the jurisdiction, purpose and objectives of the investment. This instrument is referred to as the ‘Collateral’ as it represents solid collateral, capable of being used for many different purposes by the Recipient. This includes using it to secure credit and loans or to secure other financial commitments such as trade indemnities, documentary letters of credit,contracts, tenders and numerous other uses.

At the end of the contract term, the Recipient agrees to extinguish any encumbrances held on or against the Collateral (i.e. any loans or obligations that may have been secured upon it whilst in the Recipients’ possession) and allow it to lapse freely without its liberation. Any loans should be repaid prior to the Collateral’s expiry date and provisions to indemnify the Provider against any loss incurred by default of loans that may have been secured upon it. Hence, in these types of facilities the ‘investor’ is referred to as a ‘provider’ as they do not invest the physical cash – the life-blood of the business but rather ‘provides’ the Collateral needed by the Recipient to undertake his objectives.

Of course, if the objectives of the Recipient are to raise physical cash, then they may utilize the Collateral to do just that by using it to raise credit lines and secure loans. Since such Collateral is a ‘bankable’ asset and widely accepted as security by international lenders, this is a relatively simple task. However, Recipients intending to use the Collateral specifically as loan security are normally required to declare this to the Provider in advance as there may be requirements to accommodate such provisions within the Collateral Transfer Contract. It is therefore recommended that potential applicants considering these facilities utilize the services of an experienced professional firm capable to both secure the Collateral Transfer facility and to also facilitate any loan or credit facility bolted on to (or to be secured against) the incoming Collateral.

Collateral received under Collateral Transfer facilities are no different from letter of credit and bank guarantee, standby letters of credit or any other forms of demand guarantees received in any course of business. The fact that there exists an underlying agreement (the Collateral Transfer Contract) has absolutely no bearing on the strength, wording or construction of the guarantee.

Upon conclusion of the Collateral Transfer facility, the Provider would have delivered (via his bank, referred to as the ‘Issuing Bank’) the Collateral to the Recipient’s Bank. When the Recipient receives the Collateral at his bank, he would be expected to pay a return to the Provider for the use of his collateral. As this is not a conventional investment and the rate of return is fixed and therefore is not directly linked to the financial performance of the Recipient or the business, the reward received by the Provider is referred to as a Contract Fee. This is generally a one-off payment for the duration of the contract, i.e. a fixed fee for the use of the Collateral.

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Bank Guarantee and Stand By Letter Of Credit May 22, 2021