What is a Leased Bank Guarantee?

A Bank Guarantee that is transferred on a temporary basis to the named beneficiary, has for many years been alluded to, incorrectly, as a Leased Bank Guarantee. The actual term for a Leased Bank Guarantee is Collateral Transfer or C/T Contract. It is the view of many, that the word Leased is derived from a commercial leasing contract as the terms are similar to a C/T Contract. However, the term Leased Bank Guarantee has been used for many years and is now and is now firmly embedded in financial jargon.

A C/T Contract is where the asset owner, (The Provider), instructs their bank, (The Issuing Bank) , to transfer the Bank Guarantee to the Beneficiary, who on most occasions will use the Bank Guarantee as security for a loan or a line of credit, referred to as Credit Guarantee Facilities. On these occasions, the beneficiary will have to call for a Demand Bank Guarantee. In essence, the Provider is placing their asset for a pre-determined temporary period of time with the Beneficiary, for which the Beneficiary will pay a contract fee and on the expiry of the time period, the ownership of the Bank Guarantee reverts to the provider.

One of the big problems for those companies looking to raise a line of credit is sourcing a Provider. There is no financial data -base that lists details of providers, but by utilising the Collateral Transfer Model, Providers are placed at the forefront of any transaction. The C/T model has a database of Providers such as Family Offices, Hedge Funds, Private Equity and Sovereign Wealth Funds, who with their vast array of assets, are able to provide Leased Bank Guarantees for Collateral Transfer Contracts.

Bank Guarantees differ from other financial instruments such as MTN’s and Bond’s as they cannot be bought or sold and therefore do not carry a credit rating, and are applied to the Beneficiary’s account as “Value Received”. Under such circumstances Bank Guarantees when presented as collateral for a line of credit, can on occasions be rejected by the Beneficiary’s bankers, which is due to internal compliance procedures. These procedures require banks to scrutinise the Issuing Banks credit rating, and if below investment grade will often reject credit applications. However, many other banks examine the issuing banks record on reimbursing called guarantees, and if the track record is excellent, will be in a position to approve requests for Credit Guarantee Facilities.

The Collateral Transfer Facility, which is now one of the more popular avenues for those seeking lines of credit, encompasses both the Provider’s and Beneficiary’s bankers who are required to due diligence the contacts to ensure a successful transaction is completed.