The Collateral Medium

A Bank Guarantee which is transferred from one bank to another, acts as security in case the beneficiary defaults on a repayment obligation representing the underlying contract. There are differing types of Bank Guarantee including direct and indirect, the explanations of which, will be found below. Transferring Bank Guarantees is an everyday process executed by banks worldwide. The company requesting a Bank Guarantee is the “Beneficiary” and their bankers are designated as “The Receiving Bank”, the remitting bank is designated as “The Issuing Bank” and their client who is providing the Bank Guarantee is designated as “The Provider or Applicant”.

Standby Letters of Credit (SBLC’s) and Documentary Letters of Credit (DLC’s), are often compared incorrectly with Bank Guarantees (BG’s). For information purposes, a BG is a SECURITY for a payment whilst a Standby Letter of Credit and a Documentary Letter of Credit are a Means of Payment.

When requesting a Bank Guarantee companies must remember that from a legal standpoint, they are governed by the laws of the country where the Issuing Bank is domiciled. It is prescient therefore, for companies to study Bank Guarantees on an individual basis as corporate laws differ from country to country.

A Bank Guarantee can be issued by a third party, have varying verbiage and be applied to different transactions. In certain circumstances, a bank under instructions from their client can instruct their correspondent bank to issue a BG on their behalf. This instrument is referred to as an indirect guarantee. Where a bank issues a Bank Guarantee to direct to another bank this instrument is referred to as a direct guarantee. It is however, pertinent to point out the differences between a Performance Guarantee or Surety Bond and a Bank Guarantee. Whilst a Bank Guarantee is invariably paid on DEMAND, a Performance Guarantee or Surety Bond only pays SUBJECT TO certain criteria being met.

Credit Facility Guarantees, are represented by loans, capital injections and lines of credited. Companies looking to raise a line of credit can utilise the Collateral Transfer Facility, which employs the use of Demand guarantees. Demand Guarantees have definitive verbiage as set out by ICC Uniform Rules for Demand Guarantees (URDG 760), and are payable on FIRST DEMAND.

The use of Bank Guarantees is a favoured option amongst the clientele of IntaCapital Swiss, who offer the Collateral Transfer Facility as a means whereby their clients can receive a BG on their bank account. This is an excellent opportunity to raise cash for project finance because as in most cases the client will use the Bank Guarantee to apply for a line of credit from their bankers.

Once the Bank Guarantee has been received on their bank account the client can forward their credit line application to their bankers, though normally this is agreed in advance. In the past, a few clients have advised that their bankers have turned down their application for a credit line. The reasons are varied but it is down to the relationship between the client and their bankers.

IntaCapital Swiss being fully aware that client’s bankers can from time to time reject applications for credit lines, are in the unique position of being able to replace their client’ bankers and offer them a line of credit.