BG (Bank Guarantee) Leasing

The technical term for Leased or Leasing Bank Guarantee, is Collateral Transfer or C/T Facility. For many years the word leased has been applied incorrectly to describe a Leased Bank Guarantee that is transferred on a temporary basis, from the Issuing Bank, under instructions from the asset owner, (The Provider), to the Receiving Bank favouring their client, (The Beneficiary). This misunderstanding has arisen from the similarities between a commercial leasing contract and a C/T Contract.

Under the terms of the contact between the Provider and the Beneficiary, the Beneficiary must pay the provider a contract fee for the temporary ownership of the Bank Guarantee, which is usually for the duration or term of one year. Once the term expires the ownership of the Bank Guarantee reverts back to the Provider. The utilisation of the Bank Guarantee by the Beneficiary varies from boosting the balance sheet, or acquiring a loan or credit line often referred to as Credit Guarantee Facilities. In the event of the latter, the beneficiary will require a Demand Bank Guarantee.

Bank Guarantees can be transferred from many different financial centres from around the world, where the Providers can represent Private Equity Funds, Corporations with spare assets or capital, Sovereign Wealth Funds and Family Offices. Typically, this type of Provider will issue Bank Guarantees against an asset class ranging from stock, shares and bonds, commodities such as silver, platinum and gold, cash, and extensive property portfolios.

Rating agencies such as Standard and Poors, Moody’s and Fitch, do not award ratings to Bank Guarantees, as they cannot be traded on the international markets. As such, when a Bank Guarantee is applied by the Receiving Bank to the Beneficiary’s account it is for “Value Received”. However due to compliance issues and strict credit control, some banks will attach a rating to the Bank Guarantee that reflects the rating of the Issuing Bank, and if that rating is below investment grade, they have been known to turn down loans and credit line applications made by the beneficiary. There are of course those banks that examine the history of the Issuing Bank, and if they have a good track record in honouring calls on their Bank Guarantees, they are content to go ahead and issue loans and lines of credit to the beneficiary.

Capital injections, loans and lines of credit, are becoming easier for companies to obtain by utilising The Collateral Transfer Facility. Both the Provider and the lender will issue contacts to the Beneficiary and these contacts will be studied diligently by both the Provider’s and Beneficiary’s bankers, thus ensuring a satisfactory outcome for all parties.