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BANK GUARANTEES - WHAT REALLY HAPPENS THERE!

It is proper before going into details, we know what we are talking about.

What is a Bank Guarantee?
A Bank Guarantee is where one Bank (the Issuing Bank) issues an indemnity to another Bank (the Beneficiary Bank) or directly to a Beneficiary, on behalf of its account holder. The Issuing Bank will expect its account holder to pledge ‘assets’ to the bank for its issue.

There are effectively two main types of Bank Guarantees, (1) A Direct Guarantee where the account holder instructs his bank to issue a Guarantee directly in favour of the Beneficiary, and (2) An Indirect Guarantee where a second bank is requested to issue a Guarantee in return for a counter-Guarantee. In this case the Issuing Bank will indemnify losses made by this second bank in the event of claim against the Guarantee.

A Bank Guarantee is considered a “Demand Guarantee” and as such is governed by the International Chamber of Commerce (ICC) Uniform Rules for Demand Guarantees (URDG).

For the various types of bank guarantee and wordings you may send us an email: info@jointatb.com

Bank Guarantees are written specifically for a purpose; where an account holder will instruct his bank to issue a guarantee to another bank on behalf of their account holder and the strength of a Bank Guarantee is limited to the financial standing (and rating) of the Issuing Bank.

Issuing A Bank Guarantee:
Any person or corporate entity with an account held at a mainstream bank can apply to issue a Bank Guarantee. Provided they hold to their account adequate assets, there should be no reason why a Bank will reject an application to issue a Bank Guarantee for legitimate business purposes.

The account holder will simply request his Bank to issue a Guarantee and supply them with the reasons behind its issue. The bank would have a simple application form for this service. The account holder will submit the bank the application containing details of the underlying commitment being entered into whilst supplying the bank with information such as; (a) how long the Guarantee should be for, (b) any conditions on the payment, (c) the amount and currency, and of course (d) details of the Beneficiary and their bank details and more.

For more details on how the bank communication flows you may send us an email: info@jointatb.com

Receiving A Bank Guarantee:
In receiving a Bank Guarantee, your bank will generally notify you and send you a copy of it (normally a SWIFT terminal printout) for your information. They will also inform you that it is verified and valid and will await your further instructions.

If you plan to receive a Bank Guarantee, it is important that you bank with a multi-national bank that understands them and can offer you a ‘private’ banking service. Generally we would advise working with Swiss Banks who operate the procedure well.

If you are intending to receive a Bank Guarantee from an ‘investor’ in order to secure a line or credit or loan, it is important to negotiate this facility with your bank before the Bank Guarantee arrives. This will save time and expenses.

The Bank Guarantee will normally be posted to a separate account in your name that the bank will open upon its arrival. It will be held on this account until it is either called for payment or it expires.

‘Leasing’ Bank Guarantees:
Leasing is not really the correct term to use as it is not possible to actually lease a bank guarantee in this manner. It is a misnomer. We use the term loosely as its process is almost exactly that of commercial leasing. In effect, the Provider offers temporary ownership of his assets to the Beneficiary 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 Beneficiary may utilise. It is a misnomer as in effect no leasing takes place. Through a Collateral Transfer Agreement, a Provider will agree to place his assets with a facilitating bank.

The bank will charge the asset and will raise a bank indemnity against it in favour of the Beneficiary. This bank indemnity will commonly be in the form of a Bank Guarantee issued specifically for the purpose to the Beneficiary.

Collateral Transfer or Collateral Provision is the provision of assets from one party (the Provider) to another party (the Beneficiary) under a Collateral Transfer Agreement. The Provider will effectively ‘lease’ his assets to the Beneficiary for a given term for a ‘rental’ or collateral fee. Typically, the term of ‘lease’ would be 1 year but this can often be as long as 3 or 5 years, depending on the willingness of the Provider. At the end of the term, the Beneficiary will return the collateral or allow it to lapse and indemnify the Provider against any losses that may be caused by the Beneficiary utilising the collateral or raising credit against it whilst it has been in his possession.

The Collateral Transfer Agreement will govern the conditions of the transaction, namely that the Beneficiary agrees to extinguish any lien or credit raised against the Bank Guarantee prior to its expiry. The Beneficiary will make provision that any loans secured against it are repaid at the end of the term of the Agreement.

Therefore, the Bank Guarantee being received by the Beneficiary is a Bank Guarantee issued for its intended purpose (for credit lines, security, etc). It should not be considered as a ‘leased bank guarantee’. Only the underlying assets of the Provider are effectively being leased (by definition of the word). This means that credit lining (or monetising) such bank guarantees are in no way different from credit lining other bank guarantees issued for the purposes of raising credit.

Collateral Transfer therefore is an effective way for Providers to earn increased revenue from their assets and for Beneficiaries to raise bank credit. Who ‘leases’ Bank Guarantees: Sophisticated investors that hold large portfolios of assets such as medium to long term bonds generating low annuities may often be inclined to enter enhancement opportunities that allows them to receive additional returns over their portfolios. Generally these investors would enter into collateral transfer agreements allowing their assets to be used by third parties who pay them a rental fee and who enter into contract with them.

This allows the investor to retain ownership of his assets and continue to receive his annuities thereon. In addition, the investor will receive additional returns from the rental fee giving him an enhanced return over his assets.

By collecting these assets into a pool and placing them with a world-renowned and acceptable bank, the investor will instruct the issue of a Bank Guarantee using these assets as the security. This Bank Guarantee will be sent to the receiving party. The receiving party will often credit line the Bank Guarantee in the usual way, see Credit Lining Bank Guarantees.

Investors may be motivated to enter into collateral transfer agreements due to under-performance of their existing portfolios or where their portfolio has no annuity or is long-term. Some may be motivated by the quick returns that can be achieved.
Investors acting is this way may be referred to as “Providers” of collateral. It is a growing area of collateral management.

Credit Lining ‘leased’ Bank Guarantees Credit Lining ‘Leased’ Bank Guarantees is in no way different from credit lining Bank Guarantees issued specifically for the purpose of monetising. As the Guarantee is specifically raised, it is not considered different in any way and does not alter the procedures or affect the standard ways in which Guarantees are monetised.

Costs of ‘leasing’ Bank Guarantees:
The costs and charges of preparing or arranging a ‘Leased’ Bank Guarantees, or to term it appropriately, ‘establishing Collateral Transfer Agreements’, will largely depend on the Provider of the assets, i.e the Investor. Depending on the status of the Investor and the quality of his portfolio being placed into the arrangement, it is common to attract investor’s interest at rates as low as 6% on yearly basis to as high as around 12% yearly. This is a ‘rental’ fee and is generally paid every year, or for longer contracts may be payable in advance for the term. Of course the longer the term, the lower the charges.

Applicants would be expected to fund legal costs and any associated bank fees and transfer taxes (if applicable). It would not be advisable to enter into any type of collateral transfer (or ‘lease’) arrangement unless one could afford to foot a bill of around 20 basis points (0.20%) of the amount they are seeking in advance and to ensure that they can sustain cost of borrowings at around 6% yearly, plus the costs of credit line interests of a further 3.5% yearly. It is by no means a cheap way of borrowing, but it is quick and if done correctly can be very secure.

How does JATB come in?

Joint American Trust Bank can help you arrange any sort of Bank Guarantee from a mainstream bank and monetise the instrument if need be. We will go through it's technicalities with/for you and sometimes bear the cost together with you upon a JVA. For more details how we can get this done and the rates on both facilitation and funding of bank guarantees please shoot us an email: info@jointatb.com

Note: Bank Guarantee and Bank Letter of Credit, most times can be used interchangeably but are fundamentally different. To find out more, please contact us.




 

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