What is a Bank Guarantee?

Many years ago, the introduction of “Leased” Bank Guarantees brought a new dimension for companies looking to raise loans or lines of credit usually referred to as Credit Guarantee Facilities. However, it must be pointed out that referring to Leased Bank Guarantees is incorrect as the correct designation is Collateral Transfer or C/T Facility. It is generally assumed that the word Leased is derived from a commercial leasing contact as it is very similar to that of a C/T Contract. Despite this misnomer, the term Leased Bank Guarantee is here to stay.

The owner of the asset (The Provider), will instruct the Issuing Bank to transfer the Leased Bank Guarantee to the Receiving for account of the Beneficiary for an agreed period of time, usually one year. The Beneficiary will pay a fee to the Provider for the temporary use of their Bank Guarantee, which will be returned at expiry. A Beneficiary will utilise a Bank Guarantee for a number of purposes such as balance sheet enhancement, a loan or a line of credit, referred to as Credit Guarantee Facilities and if the latter, will have to request a Demand Bank Guarantee from the Provider.

Utilising the C/T Facility, a Beneficiary will be able to access many different and diversified providers who are mainly domiciled throughout Europe, The Middle East and Asia. These providers consist of companies with extremely large balance sheets, such as Family Offices’, International Corporations, Private Equity, Sovereign Wealth and Hedge Funds, and will be able to provide Bank Guarantees against such assets as gold, silver, cash, stock and bond portfolios.

Unlike many instruments the Bank Guarantee is restricted to a straight transfer between the Provider and the Beneficiary therefore it is a non-tradeable asset, and as such does not carry a credit rating. This poses a financial conundrum for lending bankers as some, due to compliance regulations, will have to attach the Issuing Banks credit rating to the Bank Guarantee, and if that rating falls below Investment Grade, are liable to reject applications for loans and credit lines. However, many banks look at the Issuing Banks reputation with regard to calls on their Bank Guarantees and if history shows no defaults on behalf of the Issuing Bank, then applications for Credit Guarantee Facilities such as a line of credit will be looked upon most favourably.

The bankers representing both the Provider and the Beneficiary will due diligence all contracts allowing the transaction to enjoy a smooth passage. The Leased Bank Guarantee is becoming an increasing popular avenue for companies wishing to access Credit Guarantee Facilities, utilising the unique product that is the Collateral Transfer or Collateral Transfer Facility.